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Cost-benefit analysis: A guide to making strategic business decisions

While starting and running a company, you will make thousands of choices. Some decisions are significant, and some are small, but each will affect your business in some way. As time goes on, you may wonder whether there are any strategies you can implement to increase the chances of making the right decision.

Good news: There are. During the decision-making process, taking the time to perform a cost-benefit analysis (CBA) can help you determine the best course of action for a particular situation.

Just what is a cost-benefit analysis? It’s a process that allows you to compare expected potential revenues versus expected potential costs so you can better determine whether an option is right for your company.

In this article, we’ll cover everything you need to know about cost-benefit analyses and how they can help you grow your business.

What is a cost-benefit analysis?

French engineer Jules Dupuit coined the phrase “cost-benefit analysis” in the 1840s. About 100 years later, the phrase became popular with economists.

In a business context, a cost-benefit analysis outlines and analyzes the expected potential revenues against the expected potential costs, helping determine whether an action has an acceptable risk-to-reward ratio. You may also see this referred to as benefit-cost analysis. There is no difference between the two terms — they are synonymous.

Although a cost-benefit analysis can give you a better look at a project, it’s not an end-all-be-all. As we’ll detail below, a cost-benefit analysis is limited in scope, and it’s not a substitute for more sound financial strategies. When making a large-scale decision with vast sums of money, you’re better off using things like  Net Present Value  (NPV),  Internal Rate of Return  (IRR) or  Return on Investment  (ROI).

These equations analyze your cash flows and future interest rates to better determine the opportunity cost of a project. CBA merely looks at primary revenues and expenses, acting as a quick and simple tool that you can use when making a non-financial decision.

When performing a CBA, you broadly add up expected total benefits and compare them to the expected total costs. Your results produce what’s known as the “payback period.” This is an expression of how long it will take for you to repay the costs of the decision.

Although CBAs can be quite beneficial, they’re not something you should rely on all the time. There are only specific scenarios when you should use a CBA.

When should you use a cost-benefit analysis?

Cost-benefit analyses are typically used when comparing projects or making crucial business decisions. These decisions are usually heavily related to finances and spending money, and are used early in the project development phase. Some typical applications include:

• Relocating or opening a new location
• Hiring an employee
• Acquiring more capital
• Entering a new partnership
• Purchasing new equipment
• Selling equity
• Implementing a new computer system

These are all small-scale financial decisions that are straightforward. More in-depth decisions, like acquiring another company or launching a new product, deserve more thorough economic research.

Now that you know when you’ll use cost-benefit analysis, let’s take a closer look at how to calculate a CBA to determine the benefits of the project.

How to calculate a cost-benefit analysis

When running a cost-benefit analysis, you’ll essentially create a pros-and-cons list with numbers attached to each factor. To begin, you need to determine which unit of measurement you’ll use. You’ll probably end up using dollar values if you’re expressing your decision in monetary terms. You should be able to use this unit of measurement for every factor.

After determining your unit of measurement, follow these steps.

1. Figure out future costs and benefits

The first thing you need to do for a CBA calculation is to sit down and determine all of the expected costs and benefits that could take place. You can be liberal in coming up with this information.

This should be your best attempt to forecast the project. Be sure to consider and include all factors, such as labor, raw materials, reallocation of resources, training, drops in sales, etc. Determine whether the costs will be ongoing and for how long.

You’ll want to do the same for benefits as well. Some of the apparent benefits that you can consider include your profit margin, reduced labor costs or quicker turnaround time.

The most efficient way to complete a cost-benefit analysis is to refer to and implement a  cost-benefit analysis worksheet , which will ensure that you don’t miss any necessary steps. Be as thorough as possible, and don’t leave anything out. Every little bit counts, even though it may not seem like it when you’re itemizing.

Keep in mind that these numbers must be as accurate as possible. While you may have to estimate some figures, do everything in your power to narrow them down to a precise prediction of your costs and losses. A cost-benefit analysis can be very beneficial, but if the numbers are incorrect, it could be a very costly mistake.

To estimate hypotheticals, you may want to look at your past financial statements and history. You could also consider things like  an industry analysis and market research , which may give you some insight into the types of moves you’re trying to make. Also, consider speaking with experts who could more accurately put a monetary value to a specific event or occurrence.

Also, think about any indirect costs and benefits. For instance, perhaps there are social benefits like improved office morale that could occur. Maybe your decision has a significant impact on your community or your environment. Quantifying these figures and assigning a monetary value could be challenging, but estimate to the best of your ability. You’ll do this during the next step.

2. Translate the costs and benefits into monetary values

Now that you have your list of expected benefits and costs, you’ll need to assign a monetary value to them. You’ll likely find that it’s easier to measure expenses than it is benefits.

For instance, it’s much easier to say an employee working at a pop-up holiday shop for 10 hours per week, making $20 an hour, will cost you $200 per week. It’s much more challenging to predict how much revenue this person will be responsible for bringing in.

You’ll also want to think about costs from the perspective of the lifespan of the project. For example, let’s say you need to train employees on how to use new equipment. Not only will this training cost money, you’ll also lose out on potential revenue because your employees are training instead of working.

Lastly, note that you may want to consult with other decision-makers on your team during this step, especially when trying to place a value on subjective, intangible benefits and costs. Consider asking for guidance from fellow owners, stakeholders and employees. You can also  perform market research  to help you predict figures more accurately.

3. Determine the value of the project

Now that you know the expected costs and benefits of the project, you can compare the two. The easiest way to do so is by subtracting the costs of the project from the benefits. If your net benefits figure is positive, the project may be worth completing. If this figure is negative, the project will cost you more than you’ll earn.

A more in-depth way to look at this is the benefit-cost ratio, which measures cost-effectiveness. When you use this ratio, you’ll divide your benefits by your costs. The equation looks like this:

Benefit-cost ratio = benefits ÷ costs 

The higher this number is, the more likely the project is to be successful. A ratio of “1” means that you break even. Anything less than one means that you’re taking a loss.

For example, let’s say you have expected future benefits of $50,000 and expected future costs of $25,000. $50,000 ÷ $25,000 = 2. This means that you’ll earn twice your investment.

On the other hand, let’s say that your expected benefits are $25,000 and costs are $50,000. $25,000 ÷ $50,000 is 0.5. Your investments will lose money.

4. Compile your findings and plan your action

Now that you’ve completed your CBA, it’s time to determine the best course of action. Perhaps you realize that you need to go back to the drawing board and figure out ways to make the project more beneficial.

Maybe you realize that a project is worth it because it benefits outweigh costs, but you don’t have the capital to invest in project costs at this point. Whatever the case may be, now will be the time when you figure out if it’s best to execute your plan at this point in time.

The downsides of a cost-benefit analysis

A CBA is an excellent tool for providing a straightforward look at a project. But, if that project isn’t so straightforward, a CBA has severe limitations.

One of the most significant flaws of cost-benefit analyses is that they struggle to predict benefits and costs from period-to-period. You may be able to look at the benefits and value of a project as a whole, but it’s much more challenging to do so when returns vary from period to period.

These are instances when other financial calculations that we mentioned earlier, like NPV, IRR, and ROI, come into play. These equations also allow you to measure the time value of money, which acknowledges the present value of funds now is more valuable than the same amount in the future. You can’t adjust your CBA for this.

Furthermore, there is a lot of subjectivity when it comes to CBAs, especially when measuring revenues. You may find it hard to quantify and predict expected future returns. Underestimating benefits may not be the end of the world, but overestimating them can cut into your profits and have a long-lasting impact on your company.

Is a cost-benefit analysis right for your business?

Despite its shortcomings, as a small business owner, the cost-benefit analysis should be a no-brainer. It should be a staple of your decision-making. No matter how insignificant a decision may seem, it will have a ripple or butterfly effect that can have long-lasting implications for your company.

A cost-benefit analysis allows you to take your best shot at estimating these expected future costs and benefits. However, you should be aware of the limitations that CBAs can have. So long as you remember to look at your books and financial statements  for more complex decisions, you’ll put your business in a much better position for success.

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How to Conduct a Cost-Benefit Analysis

Lucid Content

Reading time: about 6 min

You’ve probably heard the saying, “You have to spend money to make money.” But maybe it should be, “You have to spend money wisely to make money.”

As your business grows, you will need to determine when and how to spend money on supplies, new equipment, new team members, and so on. You don’t want to start throwing your money around without first assessing a need, determining whether you have the money to spend, and projecting what the benefits of spending that money will be.

A cost-benefit analysis can help you determine where to efficiently spend your money for the best potential returns on your investment.

What is a cost-benefit analysis?

In 1848, a French civil engineer and economist, Jules Dupuit, wrote an article that introduced the concepts within a cost-benefit analysis. Essentially, a cost-benefit analysis involves adding up the benefits of a business decision or policy and comparing the benefits with the associated costs. Use a cost-benefit analysis to:

• Determine if an investment is sound—verify that the benefits outweigh the costs and, if so, by how much.
• Compare the total expected costs against the total expected benefits.
• Estimate the amount of time it will take to realize the benefits of your investment.

For example, say you are developing new software and your current development team is stretched to the limit. You can do a cost-benefit analysis to determine what benefits you’d gain from introducing new software to the market, how many people to hire, and how much money will be needed to pay the new hires and to estimate if the return on this investment will outweigh the costs.

How to do a cost-benefit analysis

A cost-benefit analysis, sometimes called a cost savings analysis, is critical to helping you determine whether to go forward with a new project or proposal.

Follow these six steps to help you perform a successful cost-based analysis.

Step 1: Understand the cost of maintaining the status quo

This step helps you understand the potential costs of doing nothing and can help you determine whether it is even feasible to start a new project. Sometimes doing nothing is the right thing to do. On the other hand, doing nothing can lead to disaster if you fall behind your competitors—doing nothing could end up costing you more than making an investment.

Step 2: Identify costs

Take some time to brainstorm the costs associated with the project. Make a comprehensive list that includes any cost you can think of that might have an impact, such as:

• Upfront costs
• Unexpected costs
• Tangible costs
• Intangible costs
• Ongoing or future costs
• Any potential risks that may have a cost

Consider using a mind map to brainstorm the potential costs of each project and link them back to expected benefits.

Step 3: Identify benefits

In this step, determine what the potential benefits will be if you go forward with the project. Ask yourself these questions:

• What additional revenue will come in from the investment?
• What is the return on investment? Define what the ROI means to your company—maybe you measure ROI by revenue, efficiency, or market share. However you define it, list the benefits associated with ROI.
• Determine how far into the future you should look to identify long-term benefits. If you look too far, the less confident you can be about potential benefits. For example, if you expect long-term benefits from a new computer system, rapidly changing technology could mess up your plans.

Step 4: Assign a monetary value to the costs and benefits

All costs and benefits need to be measured in the same monetary unit. If you are doing a cost-benefit analysis for a global company, don’t try to separate the costs of a project into different denominations based on country or region. It is much easier to track the actual costs and returns if you assign the same currency to everything.

When monetizing costs, be sure to include the human costs:

• How many people will be needed to complete the project?
• Will you need to hire new people?
• How much new equipment will be needed?
• Does existing equipment need to be replaced?
• Will training be involved? How much time will be lost to training?

Monetizing the benefits may not be as easy as putting a value on the costs because predicting accurate revenues can be tricky. Consult with other stakeholders to determine the value you will assign to intangible benefits, such as maintaining employee satisfaction, ensuring employees’ health and safety, or strengthening your company’s position with distributors.

Step 5: Create a timeline for expected costs and revenue

Map out when you expect the costs and benefits to occur and how much they will be. The timeline helps you align, define, and track the expectations of all interested parties. In addition, the timeline can help you plan for upcoming costs and revenue impacts, which will let you manage and adjust as necessary as things change.

Step 6: Compare costs and benefits

Calculate your total costs and your total benefits based on the lists you’ve made. Be sure to use the same currency for all of your calculations. Comparing the two values lets you determine whether the benefits outweigh the costs.

You should also consider the following when comparing costs and benefits:

The purchasing power of a dollar will be less in one year than it is today. For example, if the rate of inflation is three percent, in one year, one dollar will only be worth 97 cents. In 12 months, you’ll pay one dollar to buy an item that costs 97 cents today.

Lost return on investment

In spending money now to fund your project, you will lose potential income from interest if you were to invest the money instead.

Discount rate

This rate represents the future value of today’s currency considering the effects of inflation and the lost return on investment.

Payback period

The payback period defines how long it will take to reach your breakeven point when the benefits have repaid the costs. To calculate the payback time, divide the projected total cost by the projected total revenues.

Total cost ÷ revenue (benefits) = payback time

If you’re comparing the costs and benefits of different business decisions, you can create a decision tree to map out different scenarios, weigh the projected outcomes, and present your findings to stakeholders and decision-makers in a way that’s simple to understand.

How Lucidchart can help you conduct a cost-benefit analysis

Whether you are planning large or small projects, chances are that you are not conducting a cost-benefit analysis on your own. There may be many people within your organization who need or want to be involved in the analysis process. Because many companies have many geographical locations spread across the world, it can be impossible to get everybody in the same room at the same time.

Lucidchart can help you bring everybody together at the same time regardless of physical location. All documents are stored in and can be accessed from the cloud, meaning that all participants can work on the same document at the same time from any location in the world.

Because all your Lucidchart documents are stored in the cloud, they can be accessed and updated in real time as new ideas are thought of and decisions are made.

Sign up for a free Lucidchart account and get started today.

Lucidchart, a cloud-based intelligent diagramming application, is a core component of Lucid Software's Visual Collaboration Suite. This intuitive, cloud-based solution empowers teams to collaborate in real-time to build flowcharts, mockups, UML diagrams, customer journey maps, and more. Lucidchart propels teams forward to build the future faster. Lucid is proud to serve top businesses around the world, including customers such as Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid partners with industry leaders, including Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and workplace culture. For more information, visit lucidchart.com.

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Top 10 Cost Analysis Templates with Examples and Samples

Vaishali Rai

Have you wondered why some products or services are priced higher than others? How do companies determine the cost of their products and ensure they make a profit? The answer lies in cost analysis - a crucial aspect for businesses that helps them understand the expenses associated with producing and delivering their offerings. In today's fast-paced and competitive business landscape, where every penny counts, mastering the art of cost analysis can make all the difference between success and failure for businesses.

Cost analysis is a process of identifying and examining the various expenses associated with producing and delivering a product or service. It involves a comprehensive review of all direct and indirect costs, such as raw materials, labor, overhead expenses, and marketing and distribution costs, to determine the actual cost of the offering. It is an essential tool for every business type and size to understand their finances better, optimize their operations, and stay competitive in the marketplace.

Is your company making the most of its resources? Find it out with our Cost-Benefit Analysis Templates ! 

Stay on top of your finances with Cost Analysis Templates

SlideTeam brings you a collection of ready-made cost analysis Templates to unlock the secret to financial success. Use our content ready and custom-made PPT Slides to assess expenses, identify areas for optimization, and boost your bottom line. Get ahead of the competition by using these actionable Templates that put you in control of your company's financial health.

Check these out!

Template 1: Product Branding Repositioning and Cost Analysis Template

This Product Branding Repositioning and Cost Analysis PPT Template can be a game-changer for businesses looking to develop a new product. With this content ready PPT, businesses can brainstorm ideas, conduct a SWOT analysis, create a product roadmap, follow current market trends, understand customer needs, and analyze market trends to stay ahead of competitors. This ready-to-use Presentation features Slides on product roadmap , new product detailed cost analysis, category analysis, product life cycle, BCG matrix, Ansoff matrix, and more. It also includes professionally designed marketing and budgeting Templates to help businesses brand their products and attract consumers in the market. 

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Template 2: New Product Performance Cost Analysis PPT Slide

This pre-designed New Product Performance Cost Analysis PPT Slide is your best bet to dominate the market. Deploy this content-ready PowerPoint Template and showcase the expenses involved in creating new products, from raw materials to transportation. You can also present your marketing tactics, including guerilla marketing and social media, and reveal the revenue and costs of your new products with the Template’s intriguing quality infographics. Additionally, you can undertake a financial analysis of your investments, including land, equipment, employee costs, marketing costs, interior costs, and more.

Template 3: New Product Detailed Cost Analysis PPT Slide

Ready to boost your product's success? Look no further than our New Product Detailed Cost Analysis PPT Slide. Use our actionable PowerPoint Template to estimate costs and explain the production and operational expenses easily. Plus, our product launch cost PowerPoint graphic helps you create a cost-benefit analysis chart easily. In addition, you can highlight the costs and benefits of your new product, and our cost management strategy PowerPoint layout will help you scale your organization's financial stability in the market.

Template 4: New Product Development Cost Analysis PPT Slide

The New Product Development Cost Analysis PPT Slide will help you minimize production costs by showcasing the expenses of raw materials, equipment, and consumables. Our product strategy PowerPoint Slide allows you to conduct thorough market research, understand customer needs, and demonstrate the cost and benefits of new products. Using our product strategy, PPT Layout, and various product development models, you can deploy marketing techniques like guerrilla marketing, social media, and promotional videos for your product launch within a budget.

Template 5: New Product Cost Analysis PPT Slide

This 19-slide expertly crafted PPT Template covers everything you need to know about new product development. It highlights the production and operation cost analysis, cost-benefit charts, and marketing and launch price estimates. Its business and financial analysis Slides let you speculate, discuss, design, or demonstrate all aspects of a new product in the form of charts, graphs, and more.

Template 6: New Product Cost Analysis Report PowerPoint Slide

Optimize your business expenses and keep your budget on track with this helpful New Product Cost Analysis Report PPT Template. Compile data on your project's past and present revenue to determine the exact costs associated with providing services to your customers. It also includes an accurate cost-benefit analysis chart, helping you increase product performance and boost your organization's financial success.

Template 7: Product Cost Analysis PPT Template

Looking for an effective way to engage with your target audience and increase brand awareness? Our Product Cost Analysis PPT Template Bundle is just what you need! With high-quality content and graphics, this PPT Design will help you convey your ideas in a well-structured manner, giving you a competitive edge. You can use it to educate your audience on various topics and create compelling reports on product cost analysis to make prudent financial decisions. 

Template 8: Human Resource Recruitment Dashboard with Cost Analysis Template

Get ready to streamline your budget on human resource recruitment and training with our Dashboard and Cost Analysis Presentation! This set of slides showcases key data on the number of participants, training hours, online training, and cost per hour, giving you the insights, you need to make strategic decisions.

Template 9: Supply Chain Management with Cost Analysis Dashboard Template

Our Supply Chain Management with Cost Analysis Dashboard Template provides you with key performance areas (KPAs) such as net sales, average cash-to-cash cycle, and inventory carrying cost to help you understand the costs associated with the supply chain process. It covers topics such as supply chain costs, inventory carrying costs, warehousing, and average C2C cycle, making it an invaluable tool for any business looking to improve its bottom line.

Template 10: Project Forecast Cost Analysis Dashboard Template

Introducing the Project Forecast Cost Analysis Dashboard Template - your ultimate tool for accurate project budgeting! With this cutting-edge Template, track and analyze project costs in real-time, making informed decisions that keep your budget on track. The user-friendly interface provides detailed insights into cost projections, expenses, and variances, all presented in visually appealing charts and graphs. Stay ahead of the game with this powerful dashboard that streamlines your project management process, ensuring financial success. Say goodbye to budget surprises and hello to efficient cost analysis with our Project Forecast Cost Analysis Dashboard Template!

Understand Data Like a Pro!

As the saying goes, "Time is Money." And for businesses and organizations, wasting time on inefficient Excel sheets can be a costly mistake. That’s where our cost analysis Templates come in handy, which help you streamline your budgeting process, make informed decisions based on accurate data, and aid in product branding repositioning and cost analysis.

With customizable options, icons, graphics, and user-friendly interfaces, there's no excuse not to invest in one of the above Templates. So, wait no more! "Unlock the power of data-driven financial decisions with our cost analysis Slides today!

FAQs on Cost Analysis Templates

What does cost analysis mean.

Cost analysis evaluates the costs associated with a particular project, product, or service. It includes examining and breaking down all the expenses involved in creating or delivering a product or service, including materials, labor, overhead, and other related costs.

Cost analysis helps businesses to determine the actual cost of their product or service, identify areas where costs can be reduced or optimized, make financial decisions based on the generated data, track financial performance, improve their work processes, and stay competitive in the marketplace.

What is a cost analysis example?

A cost analysis example could be the evaluation of different options for purchasing a new piece of equipment for a manufacturing company. The cost analysis would involve comparing the costs associated with different equipment options, including the initial purchase cost, ongoing operational costs, maintenance costs, and potential cost savings or revenue generation opportunities associated with each option. The cost analysis would help the company determine which equipment option offers the best value for money, taking into account both upfront costs and long-term costs, to make an informed decision based on financial considerations.

What are the four types of cost analysis?

• Economic impact analysis: This type of cost analysis measures the economic effects of a particular policy, project, or event. Economic impact analysis comprehensively covers direct and indirect effects on various economic indicators such as employment, income, and economic output. It can help decision-makers understand a policy or project's potential economic benefits and costs.
• Marginal cost analysis: This involves examining the additional cost incurred by producing an additional unit of a product or service. Marginal cost analysis can help organizations determine the most efficient production level and make insightful pricing and resource allocation decisions.
• Life cycle cost analysis: This involves examining the total cost of a product or service over its entire life cycle, including initial investment, maintenance, and disposal costs. Life cycle cost analysis can help organizations make informed decisions about product development, pricing, and resource allocation.
• Cost-effectiveness analysis: This type of cost analysis involves comparing the costs of different interventions or programs with their respective outcomes or benefits. Cost-effectiveness analysis typically involves quantifying the outcomes in non-monetary terms, such as health interventions, environmental policies, etc. This type of analysis can help decision-makers compare different interventions or programs to identify the most cost-effective method which can impact resource allocation and investment decisions.

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What Is a Cost-Benefit Analysis?

F. John Reh is a business management expert, with more than 30 years of experience in the field. A writer and journalist over the past 17+ years, he has covered business management for The Balance.

How Cost-Benefit Analysis Works

How to run a cost-benefit analysis, cost-benefit analysis: common mistakes to avoid, how to present a cost-benefit analysis, frequently asked questions (faqs).

Image by © The Balance 2018

Key Takeaways

• A cost-benefit analysis, simply put, is a way to determine if a business decision is worth its cost
• You can run a cost-benefit analysis by adding all the benefits of a business decision and subtracting costs
• Common reason for an inaccurate cost-benefit analysis may be failure to consider costs in great detail

A cost-benefit analysis is a simple way to determine whether the gains from a business decision you're considering outweigh the costs to implement it. It can be a tool to make quick decisions for business owners.

The analysis can be used to help decide almost any course of action, but its most common use is to decide whether to proceed with a major expenditure. Since it's based on adding positive factors and subtracting negative ones to get a net result, it is also known as running the numbers.

A cost-benefit analysis doesn't just help you choose between mutually exclusive business choices, it can also be used to determine the optimal scale for a business objective.

Example Where A Cost-Benefit Analysis May Be Helpful

For example, a business has to make a choice between two paths it could take. Should they hire an additional sales person or assign overtime? Or would they be better off putting our free cash flow into securities or investing in additional capital equipment? Both of these questions can be answered by doing a proper cost-benefit analysis.

A cost-benefit analysis finds, quantifies, and adds all the positive factors involved in a proposed course of action. These are the benefits. Then all the negatives, or costs, are identified, quantified, and subtracted. The difference between the two indicates whether the planned action is advisable.

The real trick to doing a cost-benefit analysis well is making sure you include all the costs and benefits and properly quantify them.

First Attempt at a Cost-Benefit Analysis

Say you are a production manager and you are proposing the purchase of a $1 million stamping machine to increase output. Before you can present the proposal to the vice president, you need some facts to support your suggestion. You need to do a cost-benefit analysis.

First, you list the benefits. The machine will produce 100 more units per hour. The machine will replace three workers currently stamping by hand. The units will be of higher quality because they will be more uniform.

You calculate the selling price of the 100 additional units per hour multiplied by the number of production hours per month. Add another two percent for the units that aren't rejected because of the higher quality of the machine output. Then add the monthly salaries of the three workers. That's a pretty good total benefit.

Then there are the costs. The machine costs $1 million and it will consume electricity. That's about it. You calculate the monthly cost of the machine by dividing the purchase price by 12 months per year and divide that by the 10 years the machine should last.

The manufacturer's specs tell you what the power consumption of the machine is and you can get power cost numbers from accounting. You figure the cost of electricity to run the machine and add the purchase cost to get a total cost figure.

You subtract your total cost figure from your total benefit value and your analysis shows a healthy profit.

You're ready to present your analysis to the vice president, right? Wrong. You've got the right idea, but you left out a lot of detail.

Even though it seems relatively simple, there are many ways to trip up while conducting a cost benefit analysis. Here are two common factors that may cause you to either overstate the benefit or understate your costs, leading to an inaccurate conclusion from your analysis.

Select Appropriate Accounting Method

Take another look at the benefits first. Don't use the selling price of the units to calculate the value. The sales price of any item includes many additional factors that will throw off your analysis if you include them, not the least of which is a profit margin.

Instead, get the activity-based value of the units from accounting and use that number.

You added the value of the increased quality by factoring in the average reject rate, but you may want to reduce that a little because even a machine won't always be perfect.

Finally, when calculating the value of replacing three employees, be sure to add overhead costs and benefits costs in addition to their salaries. Accounting is your source for the exact number of the company's "fully burdened" labor rates.

You may have overlooked other details. For instance, you may be able to buy feedstock for the machine in large rolls instead of the individual sheets needed when the work is done by hand. This should lower the cost of material, another benefit.

Account for Costs Accurately

Now reconsider the costs. In addition to its purchase price and any taxes you will have to pay on it, you must add the cost of interest on the purchase. Even if the company buys the machine outright, you will have to include a sum in the lost interest it would have earned if the money had not been spent.

While estimating costs, keep in mind that there are both upfront and ongoing costs which need to be taken into account for a cost-benefit analysis. You should also consider cost of intangibles as well as opportunity costs that may be overlooked.

Check with finance to find out the amortization period. The machine may last ten years but the company may not keep it on the books that long. It may amortize the purchase over as little as four years if it is considered capital equipment. If the cost of the machine is not enough to qualify as capital, the full cost will be expensed in one year. Adjust the monthly purchase cost of the machine to reflect these issues.

There may still be some details you overlooked.The devil is in the details. In this case, here are some of the overlooked costs:

• Floor space: Will the machine fit in the same space currently occupied by the three workers?
• Installation: What will it cost to remove the manual stampers and install the new machine? Will you have to cut a hole in a wall to get it in or will it fit through the door? Will you need rollers or machinists with special skills to install it?
• Operator? Somebody has to operate the machine. Does this person need special training? What will the operator's salary, including overhead, cost?
• Environment: Will the new machine be so noisy that you have to build soundproofing around it? Will it increase the company's insurance premiums?

Once you have collected all the positive and negative factors and have quantified them you can put them together into an accurate cost-benefit analysis.

Some people like to add up all the positive factors, then add up all the negative factors, and find the difference between the two.

Some people prefer to make a running list that combines both factors. That makes it easier for you or anyone reviewing your work to see that you have included all the factors on both sides of the issues.

For the example above, tabulation of the cost-benefit analysis might look something like this:

Cost-Benefit Analysis: Purchase of New Stamping Machine (Costs shown are per month and amortized over four years)

• Purchase of Machine .................... -$20,000 includes interest and taxes
• Installation of Machine ..................... -3,125 including screens & removal of existing stampers
• Increased Revenue .......................... 27,520​​ net value of additional 100 units per hour, 1 shift/day, 5 days/week
• Quality Increase Revenue ..................... 358 calculated at 75% of current reject rate
• Reduced material costs ...................... 1,128 purchase of bulk supply reduces cost by $0.82 per hundred
• Reduced Labor Costs ....................... 18,585 3 operators salary plus labor o/h
• New Operator ................................. -8,321 salary plus overhead. Includes training
• Utilities ............................................ -250 power consumption increase for a new machine
• Insurance ......................................... -180 premiums increase
• Square footage ...................................... 0 no additional floor space is required

Net Savings per Month ........................... $15,715

Your cost-benefit analysis clearly shows the purchase of the stamping machine is justified. The machine will save your company more than $15,000 per month, almost $190,000 a year.

This is just one example of how you can use a cost-benefit analysis to determine the advisability of a course of action and then support it with facts.

How does a cost-benefit analysis help you make decisions?

Simply put, a cost-benefit analysis helps a business owner decide whether the dollar value of gain from a business decision is worth the dollar value of costs incurred in executing that decision. Such an analysis can help businesses decided whether they want to take on a specific project, choose between multiple mutually exclusive projects or even determine the optimal scale of a specific project.

What is an example of a cost-benefit analysis?

Consider a business looking to buy a piece of machinery. The cost benefit analysis would include determining if the costs of getting the new machine are worth the gain the business would derive from buying it. The gains can be accounted for as increased revenue from additional units produced and increased quality and consistency of the product. The costs to keep into account could include the purchase price, installation charges, costs of operating the machine, labor charges for operating the machine, insurance etc.

Small Business Administration. " Manage Your Finances ."

University of Arizona. " A Student’s Guide to Cost Benefit Analysis for Natural Resources ."

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A cost-benefit analysis, or CBA, is a simple comparison of the projected or estimated business costs or opportunities of a project against the benefits to the business. Experienced project managers know that Insights gained from this exercise are invaluable when planning and forecasting work.

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The Importance of Cost-Benefit Analysis

Business decisions are based on many different data-driven variables. A useful tool for helping evaluate whether to move forward with or abandon a key business maneuver is calculating a cost-benefit analysis.

Cost-benefit analysis gives an individual or a group of business leaders the power to evaluate a decision or consider a proposal based on an opinion-free, evidence-based evaluation of options to aid data-driven choices and plans.

A CBA involves measurable financial metrics such as revenue earned or costs saved as a result of the decision to pursue a project. It is recommended to perform a CBA during the initial stages and planning process of a project.

Any business leader can perform a cost-benefit analysis, and this responsibility usually falls on analysts and managers to conduct and evaluate. Key stakeholders should participate in and provide input on the specifics involved, especially those individuals impacted by the outcome of the analysis.

Project managers can benefit from conducting or participating in a CBA because it provides an opportunity to weigh and consider the benefits from alternative courses of action instead of continuing to follow the current plan. By considering all options and any potential missed opportunities, the cost-benefit analysis supports better decision-making moving forward.

How to Create a Cost-Benefit Analysis

To calculate the cost-benefit analysis of a project, add up all costs of the project or of a specific decision and subtract that amount from the total projected benefits of the project or decision.

If the estimated benefits outweigh the cost, this is an indication that this could be a good decision to make. If, however, the costs outweigh the benefits, then leadership may want to rethink the project or decision.

For example, if the benefits of a project could be $1 million USD in revenue and the cost to deliver the project is $500,000, then the benefits clearly outweigh the costs in this scenario.

As a project manager, you can create a cost-benefit analysis by working through these simple steps:

• Identify Project Scope: Understand the situation, determine goals, and build a framework for scope.
• List All of the Direct and Indirect Costs and Benefits Associated With the Project: A complete list of costs should include short and long-term costs of labor, inventory, materials, supplies, overhead, services, training, and fees.
• Sum It Up: Add up all of the figures using accurate estimates and historical data to support the best guess at numbers if they are not obvious.
• Evaluate the CBA: the outcomes as a group and consider how the project will affect users and the company.
• Make a Recommendation and Implement: Summarize findings and present the details to management for their review, approval, and final decision to move forward.

The Benefits of Cost-Benefit Analysis in Project Management

Cost-benefit analysis in project management involves measuring and comparing key project management metrics, for both management and financials. ivity, schedule variance, return on investment (ROI), and payback period are just a few of these metrics. The benefits of analyzing cost-benefit for project managers include:

• Gaining stakeholder support
• Receiving approval from informed management
• Obtaining the most accurate estimate of what the project development costs will be
• Easily evaluating and controlling the project’s progress over time

Other benefits to the business include higher revenue, improved customer satisfaction and employee morale, competitive market advantage, and reducing the complexity of business decisions.

Read More: What is Project Management?

Useful Tools for Preparing Cost Benefit Analysis

Diving into the specifics of a cost-benefit analysis can become complicated, depending on the project being evaluated. From simple spreadsheets to robust full-service software tools, there are many options available to help with calculating the details of cash flow; computing a benefit-cost ratio (BCR); and conducting regression modeling, valuation, and forecasting.

A good software solution will allow companies to define standard costs for resources and activities; create project budgets using estimated and standard costs; calculate costs per activity, project, portfolio, or customer; and compare budgets and actual costs per project or portfolio.

Consider one of these cost analysis software tools to help you accurately estimate and support your CBA efforts:

• Oracle Primavera: For projects of any size, this solution integrates project and portfolio planning and delivery teams for planning, resourcing, risk mitigation, scheduling, and program management.
• Harvest: Track time and gain insight from past projects with a tool that integrates with other apps and tools to fit right in with your overall workflow. You can learn more about Harvest in our software review .
• ProjectManager: This simple-to-use yet powerful software solution allows project managers to make data-driven decisions and to manage projects on any level of complexity.

Make Smarter Business Decisions With Cost-Benefit Analysis

Cost-benefit analysis provides the necessary information to make smart business projections and decisions. Project managers often perform and evaluate a CBA, so they are 100% certain their project will be successful.

Cost-benefit analysis establishes proof, which eliminates the need to constantly prove that costs are being minimized to maximize benefits. When conducting a CBA, be thorough with all estimates in order to arrive at the most accurate analysis to support necessary decisions.

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Article • 8 min read

Cost-Benefit Analysis

Deciding, quantitatively, whether to go ahead.

By the Mind Tools Content Team

(Also known as CBA and Benefit-Cost Analysis)

Imagine that you've recently taken on a new project, and your people are struggling to keep up with the increased workload.

You are therefore considering whether to hire a new team member. Clearly, the benefits of hiring a new person need to significantly outweigh the associated costs.

This is where Cost-Benefit Analysis is useful.

CBA is a quick and simple technique that you can use for non-critical financial decisions. Where decisions are mission-critical, or large sums of money are involved, other approaches – such as use of Net Present Values and Internal Rates of Return – are often more appropriate.

About the Tool

Jules Dupuit, a French engineer and economist, introduced the concepts behind CBA in the 1840s. It became popular in the 1950s as a simple way of weighing up project costs and benefits, to determine whether to go ahead with a project.

As its name suggests, Cost-Benefit Analysis involves adding up the benefits of a course of action, and then comparing these with the costs associated with it.

The results of the analysis are often expressed as a payback period – this is the time it takes for benefits to repay costs. Many people who use it look for payback in less than a specific period – for example, three years.

You can use the technique in a wide variety of situations. For example, when you are:

• Deciding whether to hire new team members.
• Evaluating a new project or change initiative.
• Determining the feasibility of a capital purchase.

However, bear in mind that it is best for making quick and simple financial decisions. More robust approaches are commonly used for more complex, business-critical or high cost decisions.

How to Use the Tool

Follow these steps to do a Cost-Benefit Analysis.

Step One: Brainstorm Costs and Benefits

First, take time to brainstorm all of the costs associated with the project, and make a list of these. Then, do the same for all of the benefits of the project. Can you think of any unexpected costs? And are there benefits that you may not initially have anticipated?

When you come up with the costs and benefits, think about the lifetime of the project. What are the costs and benefits likely to be over time?

Step Two: Assign a Monetary Value to the Costs

Costs include the costs of physical resources needed, as well as the cost of the human effort involved in all phases of a project. Costs are often relatively easy to estimate (compared with revenues).

It's important that you think about as many related costs as you can. For example, what will any training cost? Will there be a decrease in productivity while people are learning a new system or technology, and how much will this cost?

Remember to think about costs that will continue to be incurred once the project is finished. For example, consider whether you will need additional staff, if your team will need ongoing training, or if you'll have increased overheads.

Step Three: Assign a Monetary Value to the Benefits

This step is less straightforward than step two! Firstly, it's often very difficult to predict revenues accurately, especially for new products. Secondly, along with the financial benefits that you anticipate, there are often intangible, or soft, benefits that are important outcomes of the project.

For instance, what is the impact on the environment, employee satisfaction, or health and safety? What is the monetary value of that impact?

As an example, is preserving an ancient monument worth $500,000, or is it worth $5,000,000 because of its historical importance? Or, what is the value of stress-free travel to work in the morning? Here, it's important to consult with other stakeholders and decide how you'll value these intangible items.

Step Four: Compare Costs and Benefits

Finally, compare the value of your costs to the value of your benefits, and use this analysis to decide your course of action.

To do this, calculate your total costs and your total benefits, and compare the two values to determine whether your benefits outweigh your costs. At this stage it's important to consider the payback time, to find out how long it will take for you to reach the break even point – the point in time at which the benefits have just repaid the costs.

For simple examples, where the same benefits are received each period, you can calculate the payback period by dividing the projected total cost of the project by the projected total revenues:

Total cost / total revenue (or benefits) = length of time (payback period).

Custom Graphic Works has been operating for just over a year, and sales are exceeding targets. Currently, two designers are working full-time, and the owner is considering increasing capacity to meet demand. (This would involve leasing more space and hiring two new designers.)

He decides to complete a Cost-Benefit Analysis to explore his choices.

Assumptions

• Currently, the owner of the company has more work than he can cope with, and he is outsourcing to other design firms at a cost of $50 an hour. The company outsources an average of 100 hours of work each month.
• He estimates that revenue will increase by 50 percent with increased capacity.
• Per-person production will increase by 10 percent with more working space.
• The analysis horizon is one year: that is, he expects benefits to accrue within the year.

He calculates the payback time as shown below:

$139,750 / $305,500 = 0.46 of a year, or approximately 5.5 months.

Inevitably, the estimates of the benefit are subjective, and there is a degree of uncertainty associated with the anticipated revenue increase. Despite this, the owner of Custom Graphic Works decides to go ahead with the expansion and hiring, given the extent to which the benefits outweigh the costs within the first year.

Flaws of Cost-Benefit Analysis

Cost-Benefit Analysis struggles as an approach where a project has cash flows that come in over a number of periods of time, particularly where returns vary from period to period. In these cases, use Net Present Value (NPV) and Internal Rate of Return (IRR) calculations together to evaluate the project, rather than using Cost-Benefit Analysis. (These also have the advantage of bringing "time value of money" into the calculation.)

Also, the revenue that will be generated by a project can be very hard to predict, and the value that people place on intangible benefits can be very subjective. This can often make the assessment of possible revenues unreliable (this is a flaw in many approaches to financial evaluation). So, how realistic and objective are the benefit values used?

Cost-benefit analysis is a relatively straightforward tool for deciding whether to pursue a project.

To use the tool, first list all the anticipated costs associated with the project, and then estimate the benefits that you'll receive from it.

Where benefits are received over time, work out the time it will take for the benefits to repay the costs.

You can carry out an analysis using only financial costs and benefits. However, you may decide to include intangible items within the analysis. As you must estimate a value for these items, this inevitably brings more subjectivity into the process.

San Jose State University Department of Economics. (2012). An Introduction to Cost Benefit Analysis. (Available here .) [Accessed 4 September, 2012.]

Griffin, R.C. (1998). 'The Fundamental Principles of Cost-Benefit Analysis,' Water Resources Research, Volume 34, Number 8, August 1998. (Available here) .

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cyndi lynch

I don't understand why the Costs section was repeated 12 times.

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11.3: Conducting a Feasibility Analysis

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• Michael Laverty and Chris Littel et al.

Learning Objectives

By the end of this section, you will be able to:

• Describe the purpose of a feasibility analysis
• Describe and develop the parts of a feasibility analysis
• Understand how to apply feasibility outcomes to a new venture

As the name suggests, a feasibility analysis is designed to assess whether your entrepreneurial endeavor is, in fact, feasible or possible. By evaluating your management team, assessing the market for your concept, estimating financial viability, and identifying potential pitfalls, you can make an informed choice about the achievability of your entrepreneurial endeavor. A feasibility analysis is largely numbers driven and can be far more in depth than a business plan (discussed in The Business Plan ). It ultimately tests the viability of an idea, a project, or a new business. A feasibility study may become the basis for the business plan, which outlines the action steps necessary to take a proposal from ideation to realization. A feasibility study allows a business to address where and how it will operate, its competition, possible hurdles, and the funding needed to begin. The business plan then provides a framework that sets out a map for following through and executing on the entrepreneurial vision.

Organizational Feasibility Analysis

Organizational feasibility aims to assess the prowess of management and sufficiency of resources to bring a product or idea to market Figure 11.12 . The company should evaluate the ability of its management team on areas of interest and execution. Typical measures of management prowess include assessing the founders’ passion for the business idea along with industry expertise, educational background, and professional experience. Founders should be honest in their self-assessment of ranking these areas.

Resource sufficiency pertains to nonfinancial resources that the venture will need to move forward successfully and aims to assess whether an entrepreneur has a sufficient amount of such resources. The organization should critically rank its abilities in six to twelve types of such critical nonfinancial resources, such as availability of office space, quality of the labor pool, possibility of obtaining intellectual property protections (if applicable), willingness of high-quality employees to join the company, and likelihood of forming favorable strategic partnerships. If the analysis reveals that critical resources are lacking, the venture may not be possible as currently planned. 47

Financial Feasibility Analysis

A financial analysis seeks to project revenue and expenses (forecasts come later in the full business plan); project a financial narrative; and estimate project costs, valuations, and cash flow projections Figure 11.13 .

The financial analysis may typically include these items:

• A twelve-month profit and loss projection
• A three- or four-year profit-and-loss projection
• A cash-flow projection
• A projected balance sheet
• A breakeven calculation

The financial analysis should estimate the sales or revenue that you expect the business to generate. A number of different formulas and methods are available for calculating sales estimates. You can use industry or association data to estimate the sales of your potential new business. You can search for similar businesses in similar locations to gauge how your business might perform compared with similar performances by competitors. One commonly used equation for a sales model multiplies the number of target customers by the average revenue per customer to establish a sales projection:

T×A=ST×A=S

Target(ed) Customers/Users×Average Revenue per Customer=Sales ProjectionTarget(ed) Customers/Users×Average Revenue per Customer=Sales Projection

Another critical part of planning for new business owners is to understand the breakeven point , which is the level of operations that results in exactly enough revenue to cover costs (see Entrepreneurial Finance and Accounting for an in-depth discussion on calculating breakeven points and the breakdown of cost types). It yields neither a profit nor a loss. To calculate the breakeven point, you must first understand the two types of costs: fixed and variable. Fixed costs are expenses that do not vary based on the amount of sales. Rent is one example, but most of a business’s other costs operate in this manner as well. While some costs vary from month to month, costs are described as variable only if they will increase if the company sells even one more item. Costs such as insurance, wages, and office supplies are typically considered fixed costs. Variable costs fluctuate with the level of sales revenue and include items such as raw materials, purchases to be sold, and direct labor. With this information, you can calculate your breakeven point—the sales level at which your business has neither a profit nor a loss. 48 Projections should be more than just numbers: include an explanation of the underlying assumptions used to estimate the venture’s income and expenses.

Projected cash flow outlines preliminary expenses, operating expenses, and reserves—in essence, how much you need before starting your company. You want to determine when you expect to receive cash and when you have to write a check for expenses. Your cash flow is designed to show if your working capital is adequate. A balance sheet shows assets and liabilities, necessary for reporting and financial management. When liabilities are subtracted from assets, the remainder is owners’ equity. The financial concepts and statements introduced here are discussed fully in Entrepreneurial Finance and Accounting .

Market Feasibility Analysis

A market analysis enables you to define competitors and quantify target customers and/or users in the market within your chosen industry by analyzing the overall interest in the product or service within the industry by its target market Figure 11.14 . You can define a market in terms of size, structure, growth prospects, trends, and sales potential. This information allows you to better position your company in competing for market share. After you’ve determined the overall size of the market, you can define your target market, which leads to a total available market (TAM) , that is, the number of potential users within your business’s sphere of influence. This market can be segmented by geography, customer attributes, or product-oriented segments. From the TAM, you can further distill the portion of that target market that will be attracted to your business. This market segment is known as a serviceable available market (SAM) .

Figure 11.14

Projecting market share can be a subjective estimate, based not only on an analysis of the market but also on pricing, promotional, and distribution strategies. As is the case for revenue, you will have a number of different forecasts and tools available at your disposal. Other items you may include in a market analysis are a complete competitive review, historical market performance, changes to supply and demand, and projected growth in demand over time.

ARE YOU READY?

You’ve been hired by a leading hotel chain to determine the market and financial potential for the development of a mixed-use property that will include a full-service hotel in downtown Orlando, located at 425 East Central Boulevard, in Orlando, Florida. The specific address is important so you can pinpoint existing competitors and overall suitability of the site. Using the information given, conduct a market analysis that can be part of a larger feasibility study.

WORK IT OUT

Location feasibility.

You’re considering opening a boutique clothing store in downtown Atlanta. You’ve read news reports about how downtown Atlanta and the city itself are growing and undergoing changes from previous decades. With new development taking place there, you’re not sure whether such a venture is viable. Outline what steps you would need to take to conduct a feasibility study to determine whether downtown Atlanta is the right location for your planned clothing store.

Applying Feasibility Outcomes

After conducting a feasibility analysis, you must determine whether to proceed with the venture. One technique that is commonly used in project management is known as a go-or-no-go decision . This tool allows a team to decide if criteria have been met to move forward on a project. Criteria on which to base a decision are established and tracked over time. You can develop criteria for each section of the feasibility analysis to determine whether to proceed and evaluate those criteria as either “go” or “no go,” using that assessment to make a final determination of the overall concept feasibility. Determine whether you are comfortable proceeding with the present management team, whether you can “go” forward with existing nonfinancial resources, whether the projected financial outlook is worth proceeding, and make a determination on the market and industry. If satisfied that enough “go” criteria are met, you would likely then proceed to developing your strategy in the form of a business plan.

WHAT CAN YOU DO?

Love beyond walls.

When Terence Lester saw a homeless man living behind an abandoned, dilapidated building, he asked the man if he could take him to a shelter. The man scoffed, replying that Lester should sleep in a shelter. So he did—and he saw the problem through the homeless man’s perspective. The shelter was crowded and smelly. You couldn’t get much sleep, because others would try to steal your meager belongings. The dilapidated building provided isolation away from others, but quiet and security in its own way that the shelter could not. This experience led Lester to voluntarily live as a homeless person for a few weeks. His journey led him to create Love Beyond Walls (www.lovebeyondwalls.org), an organization that aids the homeless, among other causes. Lester didn’t conduct a formal feasibility study, but he did so informally by walking in his intended customers’ shoes—literally. A feasibility study of homelessness in a particular area could yield surprising findings that might lead to social entrepreneurial pursuits.

• What is a social cause you think could benefit from a formal feasibility study around a potential entrepreneurial solution?

• HR & Payroll

Break-Even Analysis Explained - Full Guide With Examples

Did you know that 30% of operating small businesses are losing money? Running your own business is trickier than it sounds. You have to plan ahead carefully to break-even or be profitable in the long run.

Building your own small business is one of the most exciting, challenging, and fun things you can do in this generation.

To start and sustain a small business it is important to know financial terms and metrics like net sales, income statement and most importantly break-even point .

Performing break-even analysis is a crucial activity for making important business decisions and to be profitable in business.

So how do you do it? That is what we will go through in this article. Some of the key takeaways for you when you finish this guide would be:

• Understand what break-even point is
• Know why it is important
• Learn how to calculate break-even point
• Know how to do break-even analysis
• Understand the limitations of break-even analysis

So, if you are tired of your nine-to-five and want to start your own business, or are already living your dream, read on.

What is Break-Even Point?

Small businesses that succeeds are the ones that focus on business planning to cross the break-even point, and turn profitable .

In a small business, a  break-even point is a point at which total revenue equals total costs or expenses. At this point, there is no profit or loss — in other words, you 'break-even'.

Break-even as a term is used widely, from stock and options trading to corporate budgeting as a margin of safety measure.

On the other hand, break-even analysis lets you predict, or forecast your break-even point. This allows you to course your chart towards profitability.

Managers typically use break-even analysis to set a price to understand the economic impact of various price and sales volume calculations.

The total profit at the break-even point is zero. It is only possible for a small business to pass the break-even point when the dollar value of sales is greater than the fixed + variable cost per unit.

Every business must develop a break-even point calculation for their company. This will give visibility into the number of units to sell, or the sales revenue they need, to cover their variable and fixed costs.

Importance of Break-Even Analysis for Your Small Business

A business could be bringing in a lot of money; however, it could still be making a loss. Knowing the break-even point helps decide prices, set sales targets, and prepare a business plan.

The break-even point calculation is an essential tool to analyze critical profit drivers of your business, including sales volume, average production costs, and, as mentioned earlier, the average sales price. Using and understanding the break-even point, you can measure

• how profitable is your present product line
• how far sales drop before you start to make a loss
• how many units you need to sell before you make a profit
• how decreasing or increasing price and volume of product will affect profits
• how much of an increase in price or volume of sales you will need to meet the rise in fixed cost

How to Calculate Break-Even Point

There are multiple ways to calculate your break-even point.

Calculate Break-even Point based on Units

One way to calculate the break-even point is to determine the number of units to be produced for transitioning from loss to profit.

For this method, simply use the formula below:

Break-Even Point (Units) = Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)

Fixed costs are those that do not change no matter how many units are sold. Don't worry, we will explain with examples below. Revenue is the income, or dollars made by selling one unit.

Variable costs include cost of goods sold, or the acquisition cost. This may include the purchase cost and other additional costs like labor and freight costs.

Calculate Break-Even Point by Sales Dollar - Contribution Margin Method

Divide the fixed costs by the contribution margin. The contribution margin is determined by subtracting the variable costs from the price of a product. This amount is then used to cover the fixed costs.

Break-Even Point (sales dollars) = Fixed Costs ÷ Contribution Margin

Contribution Margin = Price of Product – Variable Costs

Let’s take a deeper look at the some common terms we have encountered so far:

• Fixed costs: Fixed costs are not affected by the number of items sold, such as rent paid for storefronts or production facilities, office furniture, computer units, and software. Fixed costs also include payment for services like design, marketing, public relations, and advertising.
• Contribution margin:   Is calculated by subtracting the unit variable costs from its selling price. So if you’re selling a unit for $100 and the cost of materials is $30, then the contribution margin is $70. This $70 is then used to cover the fixed costs, and if there is any money left after that, it’s your net profit.
• Contribution margin ratio: is calculated by dividing your fixed costs from your contribution margin. It is expressed as a percentage. Using the contribution margin, you can determine what you need to do to break-even, like cutting fixed costs or raising your prices.
• Profit earned following your break-even: When your sales equal your fixed and variable costs, you have reached the break-even point. At this point, the company will report a net profit or loss of $0. The sales beyond this point contribute to your net profit.

Small Business Example for Calculating Break-even Point

To show how break-even works, let’s take the hypothetical example of a high-end dressmaker. Let's assume she must incur a fixed cost of $45,000 to produce and sell a dress.

These costs might cover the software and materials needed to design the dress and be sure it meets the requirement of the brand, the fee paid to a designer to design the look and feel of the dress, and the development of promotional materials used to advertise the dress.

These costs are fixed as they do not change per the number of dresses sold.

The variable costs would include the materials used to make each dress — embellishment’s for $30, the fabric for the body for $20, inner lining for $10 — and the labor required to assemble the dress, which amounted to one and a half hours for a worker earning $50 per hour.

Thus, the unit variable costs to make a single dress is $110 ($60 in materials and $50 in labor). If she sells the dress for $150, she’ll make a unit margin of $40.

Given the $40 unit margin she’ll receive for each dress sold, she will cover her $45,500 total fixed cost will be covered if she sells:

Break-Even Point (Units) = $45,000 ÷ $40 = 1,125 Units

You can see per the formula , on the right-hand side, that the Break-even is 1,125 dresses or units

In other words, if this dressmaker sells 1,125 units of this particular dress, then she will fully recover the $45,000 in fixed costs she invested in production and selling. If she sells fewer than 1,125 units, she will lose money. And if she sells more than 1,125 units, she will turn a profit. That’s the break-even point.

What if we change the price?

Suppose our dressmaker is worried about the current demand for dresses and has concerns about her firm’s sales and marketing capabilities, calling into question her ability to sell 1,125 units at a price of $150. What would be the effect of increasing the price to $200?

This would increase the unit margin to $90.Then the number of units to be sold would decline to 500 units. With this information, the dressmaker could assess whether she was better off trying to sell 1,125 dresses at $150 or 500 dresses at $200, and priced accordingly.

What if we want to make an investment and increase the fixed costs?

Break-even analysis also can be used to assess how sales volume would need to change to justify other potential investments. For instance, consider the possibility of keeping the price at $150, but having a celebrity endorse the dress (think Madonna!) for a fee of $20,000.

This would be worthwhile if the dressmaker believed that the endorsement would result in total sales of $66,000 (the original fixed cost plus the $20,000 for Ms. Madonna).

With the Fixed Costs at $66,000 we see, it would only be worthwhile if the dressmaker believed that the endorsement would result in total sales of 1,650 units.

In other words, if the endorsement led to incremental sales of 525 dress units, the endorsement would break-even. If it led to incremental sales of greater than 525 dresses, it would increase profits.

What if we change the variable cost of producing a good?

Break-even also can be used to examine the impact of a potential change to the variable cost of producing a good.

Imagine that our dressmaker could switch from using a rather plain $20 fabric for the dress to a higher-end $40 fabric, thereby increasing the variable cost of the dress from $110 to $130 and decreasing the unit margin from $40 to $20. How much would your sales need to increase to compensate for the extra cost?

Suppose the Variable Cost is $130 (and the Fixed Cost is $45,000 – our dressmaker can’t afford to have nice fabric plus get Ms. Madonna). It would make better sense to switch to the nicer fabric if the dressmaker thought it would result in sales of 2,250 units, an additional 1125 dresses, which is double the number of initial sale numbers.

You likely aren’t a dressmaker or able to get a celebrity endorsement from Ms. Madonna, but you can use break-even analysis to understand how the various changes of your product, from revenue, costs, sales, impact your small business’s profitability .

What Are the Benefits of Doing a Break-even Analysis?

Smart Pricing : Finding your break-even point will help you price your products better. A lot of effort and understanding goes into effective pricing, but knowing how it will affect your profitability is just as important. You need to make sure you can pay all your bills.

Cover Fixed Costs : When most people think about pricing, they think about how much their product costs to create. Those are considered variable costs. You will still need to cover your fixed costs like insurance or web development fees. Doing a break-even analysis helps you do that.

Avoid Missing Expenses : When you do a break-even analysis, you have to lay out all your financial commitments to figure out your break-even point. It’s easy to forget about expenses when you’re thinking through a business idea.  This will limit the number of surprises down the road.

Setting Revenue Targets : After completing a break-even analysis, you know exactly how much you need to sell to be profitable. This will help you set better sales goals for you and your team.

Decision Making : Usually, business decisions are based on emotion. How you feel is important, but it’s not enough. Successful entrepreneurs make their decisions based on facts. It will be a lot easier to decide when you’ve put in the work and have useful data in front of you.

Manage Financial Strain : Doing a break-even analysis will help you avoid failures and limit the financial toll that bad decisions can have on your business. Instead, you can be realistic about the potential outcomes by being aware of the risks and knowing when to avoid a business idea.

Business Funding : For any funding or investment, a break-even analysis is a key component of any business plan. You have to prove your plan is viable. It’s usually a requirement if you want to take on investors or other debt to fund your business.

When to Use Break-even Analysis

Starting a new business.

If you’re thinking about a small online business or e-commerce, a break-even analysis is a must. Not only does it help you decide if your business idea is viable, but it makes you research and be realistic about costs, as well as think through your pricing strategy.

Creating a new product

Especially for a small business, you should still do a break-even analysis before starting or adding on a new product in case that product is going to add to your expenses. There will be a need to work out the variable costs related to your new product and set prices before you start selling.

Adding a new sales channel

If you add a new sales channel, your costs will change. Let's say you have been selling online, and you’re thinking about opening an offline store; you’ll want to make sure you at least break-even with the brick and mortar costs added in. Adding additional marketing channels or expanding social media spends usually increases daily expenses. These costs need to be part of your break-even analysis.

Changing the business model

Let's say you are thinking about changing your business model; for example, switching from buying inventory to doing drop shipping or vice-versa, you should do a break-even analysis. Your costs might vary significantly, and this will help you figure out if your prices need to change too.

Limitations of Break-even Analysis

• The Break-even analysis focuses mostly on the supply-side (i.e., costs only) analysis. It doesn't tell us what sales are actually likely to be for the product at various prices.
• It assumes that fixed costs are constant. However, an increase in the scale of production is likely to lead to an increase in fixed costs.
• It assumes average variable costs are constant per unit of output, per the range of the number of sales
• It assumes that the number of goods produced is equal to the number of goods sold. It believes that there is no change in the number of goods held in inventory at the beginning of the period and the number of goods held in inventory at the end of the period
• In multi-product companies,  the relative proportions of each product sold and produced are fixed or constant.

So that's a wrap. Hope you found this article interesting and informative. Feel free to subscribe to our blog to get updates on awesome new content we publish for small business owners.

Key Takeaways

Break-even analysis is infinitely valuable as it sets the framework for pricing structures, operations, hiring employees, and obtaining future financial support.

• You can identify how much, or how many, you have to sell  to be profitable.
• Identify costs inside your business that should be alleviated or eliminated.

Remember, any break-even analysis is only as strong as its underlying assumptions.

Like many forecasting metrics, break-even point is subject to it's limitations; however it can be a powerful and simple tool to provide a small business owner with an idea of what their sales need to be in order to start being profitable as quickly as possible.

Lastly, please understand that break-even analysis is not a predictor of demand .

If you go to market with the wrong product or the wrong price, it may be tough to ever hit the break-even point. To avoid this, make sure you have done the groundwork before setting up your business.

Head over to our small business guide on setting up a new business if you want to know more.

Want to calculate break even point quickly? Use our handy break-even point calculator.

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How to Write a Business Plan, Step by Step

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What is a business plan?

1. write an executive summary, 2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. summarize how your company operates, 10. add any additional information to an appendix, business plan tips and resources.

A business plan outlines your business’s financial goals and explains how you’ll achieve them over the next three to five years. Here’s a step-by-step guide to writing a business plan that will offer a strong, detailed road map for your business.

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A business plan is a document that explains what your business does, how it makes money and who its customers are. Internally, writing a business plan should help you clarify your vision and organize your operations. Externally, you can share it with potential lenders and investors to show them you’re on the right track.

Business plans are living documents; it’s OK for them to change over time. Startups may update their business plans often as they figure out who their customers are and what products and services fit them best. Mature companies might only revisit their business plan every few years. Regardless of your business’s age, brush up this document before you apply for a business loan .

» Need help writing? Learn about the best business plan software .

This is your elevator pitch. It should include a mission statement, a brief description of the products or services your business offers and a broad summary of your financial growth plans.

Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.

» MORE: How to write an executive summary in 6 steps

Next up is your company description. This should contain basic information like:

Your business’s registered name.

Address of your business location .

Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.

Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.

Lastly, write a little about the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.

» MORE: How to write a company overview for a business plan

The third part of a business plan is an objective statement. This section spells out what you’d like to accomplish, both in the near term and over the coming years.

If you’re looking for a business loan or outside investment, you can use this section to explain how the financing will help your business grow and how you plan to achieve those growth targets. The key is to provide a clear explanation of the opportunity your business presents to the lender.

For example, if your business is launching a second product line, you might explain how the loan will help your company launch that new product and how much you think sales will increase over the next three years as a result.

» MORE: How to write a successful business plan for a loan

In this section, go into detail about the products or services you offer or plan to offer.

You should include the following:

An explanation of how your product or service works.

The pricing model for your product or service.

The typical customers you serve.

Your supply chain and order fulfillment strategy.

You can also discuss current or pending trademarks and patents associated with your product or service.

Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.

Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.

Include details about your sales and distribution strategies, including the costs involved in selling each product .

» MORE: R e a d our complete guide to small business marketing

If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.

Accounting software may be able to generate these reports for you. It may also help you calculate metrics such as:

Net profit margin: the percentage of revenue you keep as net income.

Current ratio: the measurement of your liquidity and ability to repay debts.

Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.

This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.

This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.

Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.

Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.

NerdWallet’s picks for setting up your business finances:

The best business checking accounts .

The best business credit cards .

The best accounting software .

Before the end of your business plan, summarize how your business is structured and outline each team’s responsibilities. This will help your readers understand who performs each of the functions you’ve described above — making and selling your products or services — and how much each of those functions cost.

If any of your employees have exceptional skills, you may want to include their resumes to help explain the competitive advantage they give you.

Finally, attach any supporting information or additional materials that you couldn’t fit in elsewhere. That might include:

Licenses and permits.

Equipment leases.

Bank statements.

Details of your personal and business credit history, if you’re seeking financing.

If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.

How much do you need?

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We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

Here are some tips to write a detailed, convincing business plan:

Avoid over-optimism: If you’re applying for a business bank loan or professional investment, someone will be reading your business plan closely. Providing unreasonable sales estimates can hurt your chances of approval.

Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.

Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.

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Cost-Benefit Analysis for Business Cases (Definition, Steps, Example)

When you prepare a project in line with PMI or other established project management methodologies , you will have to create a project business case. This business case is usually a study on the expected qualitative and financial benefits of a single project or different project options. An essential part of this process is the cost-benefit analysis (sometimes also called benefit-cost analysis).

What Is a Project Business Case?

What is a cost-benefit analysis used for, net present value (npv), benefit-cost ratio (bcr), payback period (pbp / pbp), return on investment (roi), internal rate of return (irr), comparison of approaches – differences between npv vs bcr vs pbp vs roi vs irr, step 1) define the scope and purpose of a cost-benefit analysis, step 2) define the fundamental assumptions, step 3) determine the qualitative advantages and disadvantages of a project or investment option, step 4) develop a forecast of investments, costs and benefits, step 5) choose the methods to assess a project option (e.g. npv, bcr, irr), step 6) calculate the value of the success measures, step 7) consolidate, compare and interpret the results, forecast of cash flows, determination of the discount rate, comparison of npv, bcr, pbp, roi and irr results.

Before a project is initiated, the potential benefits need to be analyzed in a project business case. This document is also the basis for stakeholder decisions and the selection of project options.

The Project Management Institute (PMBOK®, 6 th ed., part 1, p. 30) defines the business case as a ‘documented economic feasibility study’ that outlines the business needs, the current situation, an economic analysis and recommendations. In practice, the structure of business case documents is typically tailored to the requirements and expectations of the stakeholders and the organization. In order to evaluate the economic effects of a project and make different project options comparable, project managers leverage the tools and techniques of the cost-benefit analysis (see next section).

A business case is often accompanied by a benefits management plan (which is also suggested by the PMBOK). This document sets out how the project is going to ensure that the expected benefits will eventually materialize in reality. Both the business case and the benefits management plan are the foundation and input documents of the project charter which is the formal documented authorization and mandate for the initiation of a project.

What Is a Cost-Benefit Analysis?

A cost-benefit analysis is an economic evaluation of investment alternatives and project options with respect to their profitability and liquidity effects. It can also consider non-financial and qualitative aspects which however may or may not be reflected in the forecast of cost and benefits.

Besides forecasting investments, cost and benefits over an individually defined time horizon, a cost-benefit analysis usually involves a number of indicators. These measures aggregate forecasts and assumptions into catchy numbers that can be used for comparison and communication purposes.

Discounting cash flows, determining the amortization time, and calculating return rates are the most common approaches for calculating key performance indicators of a forecast in a cost-benefit analysis. We will cover these approaches in detail in the next section.

There are several reasons for using a cost-benefit analysis. The most obvious one is to determine the expected financial returns and profitability of an investment or a project. Subsequently, different options can be compared with each other based on cost-benefit analyses. This can be the basis for decision-making and the selection of the alternative or option to go for (source). This is a typical step before project initiation and often part of a project business case.

The initial cost-benefit analysis results also serve as a baseline for the measurement of success in an ongoing project. Thus, they help project managers, sponsors and other stakeholders to measure, monitor and manage the value a project is creating against the original expectation.

Although the cost-benefit analysis is not an original risk management technique, its results can be used to assess and consider certain risks of a project. An example is a benefit-cost ratio greater than 1: the closer it gets to 1, the higher the risk that even small deviations from the forecasted benefits lead to a loss-producing project.

On the other side, discounted cash flow-based approaches can be calculated using a risk-adjusted discount rate. This allows taking inherent risk into account when net present values or benefit-cost ratios are calculated.

What Are Common Tools and Techniques of a Cost-Benefit Analysis?

An inevitable part of a project business case and a cost-benefit analysis are certain success measures. While the set of indicators needs to be in line with the organization’s requirements, there are in fact a number of very common indicators that are introduced below.  Although the following list is not exhaustive, it covers the generic types of the most common success measures, namely:

• Net present value (NPV),
• Benefit-cost ratio (BCR),
• Payback period (PBP or PbP),
• Return on investment (ROI),
• Internal rate of return (IRR).

These success measures allow project managers to conduct a balanced cost-benefit analysis that covers different aspects such as profitability, liquidity and riskiness of project options. At the same time, these indicators are comparatively simple to calculate and easy to understand in the course of stakeholder communication .

The NPV represents the present value of a series of cash flows. The calculation involves the discounting of net cash flows with a discount rate. This rate is part of the set of assumptions required for applying the net present value method.

The underlying series of cash flows begins with the initial investment as an outflow, followed by net cash flows for each period of the time horizon of the forecast. Future cash flows and a remaining value (or salvage value), as well as disposal costs or further returns expected in subsequent periods, are reflected in a residual value.

Read more in our article on the net present value and use our NPV calculator to determine the value of your project options and investment alternatives.

What Is the Net Present Value (NPV) & How Is It Calculated?

Net Present Value (NPV) Calculator

The benefit-cost ratio compares the present values of all benefits with the present value of all costs expected in a project or investment. A value greater than 1 indicates a profitable project with a total return exceeding the discount rate. A value of less than 1 suggests that the forecasted series of cash flows is not a profitable option.

Read more in our article on the benefit-cost ratio and use our BCR calculator to determine the value of your project options and investment alternatives.

What Is the Benefit Cost Ratio (BCR)? Definition, Formula, Example.

Benefit Cost Ratio (BCR) Calculator

The payback period determines the period in which the cumulative cash flows of a project turn positive for the first time. At that point, the initial investment has been ‘paid back’.

The series of cash flows usually starts with an investment (an outflow, hence a negative number), followed by positive and/or negative net cash flows. These can be even, i.e. the net cash flow remains constant for the entire forecast horizon, or uneven with different values among the periods of a forecast.

When determining the payback period, the generic approach does not use any discount rates or other adjustments which may be inaccurate for long-term forecasts. However, there are a number of modified PbP approaches that can be used to resolve this disadvantage.

Read more in our article on the payback period and use our PbP calculator to determine the value of your project options and investment alternatives.

Payback Period Calculator – PbP for Even & Uneven Cash Flows

The basic formula of the ROI is a division of expected constant returns by the investment amount. It is usually calculated for only one period. However, there are several variants of the return on investment method, including a cumulative and annualized ROI (for multiple periods).

Return on Investment (Single & Multi-Period ROI): Formulae, Examples, Calculator

The internal rate of return is determined by using a net present value calculation. The IRR is the discount rate that would lead to an NPV of 0 if applied to the individual forecast. The resulting rate is the fictive interest or return rate of an investment.

Internal Rate of Return (IRR) vs. ROI – What Are the Differences?

IRR Calculator: Internal Rate of Return (IRR) of Projects

How to Do a Cost-Benefit Analysis in 7 Steps

Follow these 7 steps to prepare a cost-benefit analysis. You will need some input data, as set out in the individual steps, a calculator and a fundamental understanding of the aforementioned indicators. You can download this checklist which will help you gather the required information and data.

The following steps refer to both the qualitative and the financial aspects of a cost-benefit analysis.

First things first: before you start assessing different project options or investment alternatives, make sure that you develop and agree on a clear definition of the scope and purpose of the analysis.

The scope describes what exactly you are going to evaluate. This may refer to high-level project options, single investments or other types of endeavors that are selected for the analysis. For a proper cost-benefit analysis, it should be clear which components are expected to be included (e.g. indirect / internal costs and benefits) and which are not (e.g. direct or indirect taxes).

Determining the purpose of the analysis relates to the expected result type. It clarifies whether solely economic aspects are to be considered, or whether qualitative criteria are also relevant and part of this analysis. A project manager should also be aware of whether profitability, liquidity or risk is the organization’s most relevant consideration.

Examples of cost-benefit analyses that may not solely focus on economic criteria are non-profit projects or social projects run by governments or NGOs.

Before you start, make sure that the basic assumptions of the analysis are known and will be considered in subsequent steps. Assumptions may range from implementation scenarios, headcount, resource needs, etc. to agreed expectations regarding the discount rate and the organization’s target profitability.

Make sure that you are incorporating and addressing all the criteria deemed important by the organization. If you compare different project options, it is crucial that the assumptions are used consistently among all the alternatives you are comparing.

If different or even contradicting types of assumptions are requested, you should consider assessing them separately and in different scenarios.

Gather and document the pros and cons of each and every option you are assessing. Group them into categories and compare them among each other, e.g. in a structure similar to our table in the previous section.

Depending on the type of project, you may wish to consider converting qualitative aspects into financial benefits or cash flow equivalents. This could be done for qualitative advantages that are indirectly affecting financial cash flows. Examples are increasing process efficiency, customer satisfaction and engagement as well as improved quality of products and services.

This may however not be working for other types of advantages and disadvantages. For instance, social and ecological considerations ( source ) as well as long-time effects such as brand image may not be convertible into cash flows of a mid-term forecast.

Come up with a forecast of future benefits and costs (or cash inflows and outflows), investment amounts and other financial considerations.

Depending on the complexity of the options that you are analyzing, you may want to involve subject matter experts to create or validate estimates.

This step usually requires a number of assumptions on a granular level. You should therefore develop an understanding of the uncertainty inherent in this forecast. If you are in doubt, you better create different scenarios (e.g. a base and a worst case) to reflect situations where things turn out differently than expected.

A cost benefit analysis can be performed with different tools and techniques. Net present value, benefit-cost ratio , payback period, return on investment and internal rate of return are the most common methods to assess economic effects from projects, investments and initiatives. Refer to the above-mentioned introduction and read the detailed articles on these measures. Eventually, you will come up with a set of indicators that is suitable for the individual situation.

If you have selected the indicators, you need to apply them to the forecasts that you have developed in a previous step. You will find the formulas in the detailed articles on those methods . When calculating the success measures, apply every method in a consistent manner to all options. This will ensure the comparability and thus the integrity of the results.

As a last step, consolidate all the aspects and results that you have produced in the course of the analysis. You can do this by creating a table that contains the calculated values, the qualitative pros and cons and a ranking of each of the options.

If you are working in scenarios, you will probably want to breakdown each option into the different scenarios (e.g. best, middle, worst case) that you have used previously.

At the completion of the cost-benefit analysis, you should have a clear view on the economic and qualitative aspects of the alternatives you are comparing. Ideally, you are able to recommend a certain option or discard others at this point.

Example: Assessing Project Options with NPV, BCR and PbP

In this illustrative example, we will compare 3 different project options for the implementation of a new IT system with each other. For illustrative purposes, the analysis focuses on the economic aspects only, not taking qualitative and strategic considerations into account.

In order to perform the cost-benefit analysis with all three options, the project manager has obtained estimates of the investments , running and maintenance costs and expected benefits. The benefits consist of both savings from more efficient processes and increased revenue given that the new software improves the way customers are served. The following table shows the consolidated forecast of the three alternatives.

One could be tempted to simply calculate the sum of the cash flows. However, this is not an accurate approach to deal with cash flows occurring at different points in time. We will nevertheless use the simple sum in the result table for comparison purposes.

If one of the more accurate approaches such as NPV and BCR are used, a discount rate is necessary to perform the calculation. This discount rate can be a market interest rate which may be risk- or time-adjusted. In organizations and projects, more common alternatives are either the company’s target return rate or the cost of capital. In this example, the organization expects a return of 12% on all investments which will be used as a discount rate accordingly.

The following table compares the results of the different methods applied to this example. Refer to the dedicated articles on each of these indicators for the respective illustrated step-by-step calculation.

Based on the economic cost-benefit analysis, Option 3 seems to be the most promising one in all measures except ROI. Although the simple sum of its net cash flows is the lowest in this comparison, it creates the highest net present value and the highest internal rate of return. This is because the period when expenses and benefits occur is considered in the NPV. It also comes with the highest benefit-cost ratio. Thus, there is a certain buffer if the benefits do not materialize in the way it was initially expected. With a payback period of 4.71, this option achieves a full amortization in less than 5 years which can be a reasonable time horizon for many organizations.

Option 2 which has the highest sum of non-discounted cash flows does in fact not even yield the required return rate of 12%. As this rate has been used as a discount rate, both the BCR and the NPV indicate a non-profitable investment.

Note that the ROI, as well as the annualized ROI, are not accurate for these examples. Refer to the detailed ROI calculation for further explanations. We have not included the Disconted Payback Period (DPP) as it is not mentioned in the PMBOK. You can find the DPP for the above case study in this article though.

This example refers to the economic aspects of a cost-benefit analysis. In practice, you would want to consider and analyze the qualitative pros and cons as well.

A proper project business case usually requires a financial cost-benefit analysis. While there are a number of calculation methods that help compare and evaluate different project options, you should be aware of the risks and weaknesses ( source ).

Financial models and indicators are always an abstraction of the reality and forecasts may or may not be met in reality. Therefore, all the methods introduced above rely on assumptions. In some cases, it may even be only one single figure turning it into a loss-producing or profitable option (e.g. a perpetuity in the NPV).

So, make sure you understand these dependencies, work with different scenarios if sensible and maintain a comprehensive and honest communication with the stakeholders. Read our detailed articles on cost-benefit analysis methods to learn more about these methods and use this checklist when doing a cost-benefit analysis.

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• Project planning |
• Project cost management: Definition, st ...

Project cost management: Definition, steps, and benefits

Cost management is the process of planning, budgeting, and reporting project spend in order to keep teams on budget and overall costs reasonable. In this article, we'll go over the four functions of cost management and explain exactly how to use them to improve your project's bottom line.

What is cost management?

Cost management is the process of estimating, budgeting, and controlling project costs. The cost management process begins during the planning phase and continues throughout the duration of the project as managers continuously review, monitor, and adjust expenditures to ensure the project doesn't go over the approved budget.

Why is cost management important?

Have you ever wondered what happens when a project goes significantly over budget? The consequences can be severe—from strained relationships with clients to financial losses. Let's consider an example:

A small software development team was tasked with creating a custom application for a client. Midway through, they realized the project was quickly exceeding the initial budget. They faced a common dilemma: continue as planned and absorb the extra costs or re-evaluate their approach.

By implementing rigorous cost management strategies, the team was able to identify areas where expenses were ballooning. They streamlined their project management processes, prioritized essential features, and renegotiated terms with subcontractors. This approach not only brought the project back within budget but also improved their working relationship with the client, who appreciated their transparency and commitment to delivering value.

This scenario highlights how effective cost management can transform a potentially disastrous situation into a success story.

How to create a cost management plan

Cost management is a continuous, fluid process. However, there are four main elements or functions that can be found in any cost management plan:

Resource planning

Cost estimating, cost budgeting, cost control.

Because new expenses can appear and project scope can be adjusted, cost managers need to be prepared to perform all four functions at any time throughout the project life cycle. Your workflow will vary according to the project’s needs.

Here, we'll break down each of the four elements in greater detail and explain what is required from the cost manager at each stage.

The very first step in any cost management process is resource planning, which is when the cost manager reviews the project's scope and specs to figure out what resources the project will require.

A resource is anything that helps you complete a project—including tools, money, time, equipment, and even team members. To create the most accurate resource plan possible, consult directly with team leads and stakeholders about what resources they will need during the project. People with hands-on experience in each project department will have a better understanding of what resources will be required. 

For this step, you'll need:

Clearly defined project objectives

A high-level project roadmap or a work breakdown structure (WBS) , depending on the complexity of the project

A tentative resource management plan

A project scope statement

Once you have a list of necessary resources, the next step is to estimate what it will cost to procure them. The key to this step is to gather as much pricing information as possible so that you can make informed cost estimates.

For tangible resources like tools, supplies, and equipment, get real price quotes from sellers to inform your cost estimate. For labor costs, get multiple price quotes from potential contractors to help give you a realistic idea of what the work you require will actually cost. Keep in mind that some time may pass between when you make your estimate and when these items will be purchased, so you should build in some room in case prices rise. 

In addition to building in a cushion for each individual cost, you'll also need to add a buffer of 5–10% to your cost total to account for unexpected expenses. If this is your first time working with this project team, find out if the previous cost manager generated budget reports at the end of past projects. 

You can take a look at how much previous projects' final costs deviated from their initial estimates and use this cost data as a benchmark to estimate how much of a margin you need to build into your estimation report.

In the estimation stage , you'll need:

Project schedule or a PERT chart , depending on the complexity of the project

A list of your project deliverables

Clearly defined success metrics

Now that you have general estimates for your project needs and resource requirements, you can begin to work on your project budget . Your project budget is a detailed plan of how much you plan to spend during the project, for what, and by when. 

Depending on the complexity of your project, the “when” may significantly influence your cost management strategy. For multi-year projects, you may want to specify cost allocations so that no more than 30% of your budget should be spent in the first year, etc. This can prevent cost overruns later down the road.

In this stage, you'll need:

A project budget document 

A project stakeholder analysis

The bulk of the cost management process is made up of cost control . This is the process of recording and accounting costs as the project progresses, making adjustments, and alerting stakeholders to problems when they occur. The goal of the cost control step is to compare actual project costs with original budgets and estimates and take steps to make sure the project stays as close to plan as possible.

The frequency with which you review this will depend on your project. Sometimes you’ll want to review costs in real time. In other cases, you may check in monthly or even quarterly. Share cost updates as necessary through project status reports so the entire project team is on the same page.

Keep in mind that any changes to the project scope will impact the project budget and costs, so keep a close eye on scope creep. If the project cost deviates too much from what you budgeted, let your stakeholders know so you can proactively come up with an action plan.

Project management tool

Universal reporting tool

Post-project cost accounting

Once the project is over, it’s time to calculate cost variance and evaluate how far your project deviated from your original budget and estimates. What were the project’s total costs? How did your actual costs compare to your estimated costs? 

A successful project ends close to (but under) the forecasted project budget. If you spent too much money, you either underestimated your project budget or had too many unforeseen expenses. If this happens, hold a project post-mortem meeting to evaluate why that happened and prevent it from happening in the future.

On the flip side, spending too little of your budget is also not ideal. You estimated these costs for a reason, and if you came in significantly under budget, your cost-budgeting process was inaccurate. Log this information as historical data and keep it in mind for future projects, so you can increase your accuracy during the cost estimation phase.

How to calculate project costs

To ensure that your project stays profitable and within budget, it is essential to have a solid understanding of how to calculate project costs. 

Project managers have a variety of cost management methods to choose from, and picking the best one depends on the specific needs and scope of your project. Consider factors like project complexity, the predictability of tasks, client expectations, and the level of flexibility you'll need to achieve your cost-performance goals.

Calculating project costs on an hourly basis involves paying for the amount of work done, measured in hours. This method is particularly effective for projects where the scope is flexible or uncertain because it allows for adaptability as the project progresses. 

For example, consider a software development project. The development team's cost is calculated based on the number of hours they spend on the project. If the team works 100 hours a month at a rate of $100 per hour, the project costing for that month would be $10,000. This method provides flexibility and can accommodate changes in the project's scope effectively.

A flat rate, or fixed price, approach involves agreeing on a total project cost upfront. This method is ideal for projects with a well-defined scope and deliverables. This gives both parties a clear understanding of the total cost.

Imagine a marketing campaign. The agency and the client agree on a fixed price of $20,000 for the entire campaign. This price covers all aspects of the project, from planning to execution. The advantage here is predictability in budgeting, as the client knows exactly how much the project will cost, irrespective of the time and resources utilized.

The cost-plus method involves charging the actual costs of the project plus a markup or additional fee. This approach is often used in long-term projects where the costs cannot be accurately estimated at the start. It ensures that all project costs are covered and includes a profit margin.

For instance, in a construction project, the contractor charges for the actual costs incurred (like materials and labor) plus a fixed percentage as profit. If the material and labor costs amount to $50,000 and the agreed markup is 20%, the total charge to the client would be $60,000. This cost management method aligns the interests of the client and the contractor, as both parties aim for optimal cost performance.

Value-based pricing

Value-based pricing focuses on the value or benefit the client receives rather than the cost of the project itself. This estimation method is ideal for projects where the outcome has a high perceived value, regardless of the actual cost of delivery.

Consider a scenario where a consulting firm is helping a client increase their annual revenue. If the consultant's strategies result in a $1 million revenue increase, the consultant may charge a fee based on a percentage of the revenue increase, say 10%, which would be $100,000. Value-based pricing ensures that the pricing reflects the value delivered.

Effective project cost management methods

One of the most persistent challenges faced by teams across various industries is controlling and preventing budget overruns. These overruns not only strain financial resources but can also lead to compromised project quality, delayed timelines, and even project failure. 

Effective cost management is the key to tackling this challenge because it makes certain that projects are delivered within their allocated budgets while maintaining high standards of quality and efficiency.

Choosing the best cost-management method is key to addressing these financial challenges head-on. For further cost optimization, teams can leverage automation, management software, and dashboards that offer real-time cost analysis, cash flow, and future cost visualization. This will ultimately contribute to the success of your project.

Top-down estimating

Top-down estimating is a method where the overall project cost is estimated first, and then individual costs are deduced from this total. This approach is beneficial in the early stages of project planning, when detailed information is not yet available. It gives a quick and rough idea of how much the project will cost.

For example, in a new software development project, the project manager might estimate the total project cost at $200,000 based on previous similar projects. This total cost is then broken down into smaller segments like design, coding, testing, and deployment, each allocated a portion of the total budget. This method is effective for providing a preliminary cost framework and guiding early project decision-making.

Bottom-up estimating

Bottom-up estimating is the reverse of the top-down approach. It involves estimating individual tasks or components of the project first and then adding them up to get the total project cost. This estimation method is more accurate and reliable, especially for projects with a well-defined scope, as it considers detailed cost information.

Consider a construction project where each part of the project, such as foundation laying, framing, plumbing, and electrical work, is estimated individually based on detailed analysis. After estimating all these components, the costs are summed up to determine the overall project budget. Bottom-up estimating is ideal for teams that need precise control over each aspect of the project's costs.

Earned value management

Earned value management (EVM) is a sophisticated approach to cost management that combines measurements of project performance in terms of scope, schedule, and cost. EVM provides a comprehensive view of the project's progress and its alignment with the original project planning.

For instance, in a large infrastructure project, EVM would be used to track the following: 

Budgeted cost of work scheduled (BCWS)

Actual cost of work performed (ACWP)

Budgeted cost of work performed (BCWP) 

By comparing these figures, project managers can gauge the project's cost performance and take corrective action if necessary.

Three-point estimating

Three-point estimating is used to determine a more realistic estimate by considering three scenarios: 

Most optimistic (best-case) 

Most pessimistic (worst-case) 

Most likely 

This cost management method provides a range of possible outcomes, which can increase the predictability and cost performance of a project.

Take, for example, a new product development project. The project manager might estimate that the design phase could take 30 days (optimistic), 45 days (most likely), or 60 days (pessimistic). Using these three points, they calculate an average or weighted average duration, which helps in setting realistic timelines and budgets.

FAQ about cost management

What is the first step in project cost management.

The first step in project cost management is to define the baseline for your project's budget. This involves identifying all potential costs and inputs related to the project, including labor, materials, equipment, and any other expenses. Creating a baseline is essential because it provides the framework for monitoring and controlling expenses during the lifecycle of a project.

What are the 5 functions of cost management?

The five key functions of cost management are:

Cost estimation: Determining the total cost required for completing the project.

Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.

Cost control: Monitoring project expenses and implementing measures to keep costs within the approved budget.

Cash flow management : Ensuring there is adequate cash flow to meet project needs, which is critical for maintaining project momentum.

Procurement management: Managing the procurement of goods and services, ensuring that everything is obtained at the best possible cost and meets project needs.

What is cost management in project management?

Cost management in project management is the process of planning, estimating, budgeting, and controlling costs with the aim of completing the project within the approved budget. It involves a continuous process of measuring and monitoring project activities and expenses and implementing necessary adjustments to ensure that the project's financial resources are used effectively. 

Improve your project performance with cost management

Cost management has a lot of moving parts. But as long as your team has visibility into project costs, you can prevent cost overruns and ensure you’re finishing your project under budget every time.

To keep track of all of your project’s information, use a work management platform like Asana. From project costing and kickoff to post-mortem, Asana helps you stay in sync with your project team members and stakeholders during the entire project process.

Related resources

Understanding dependencies in project management

How Asana uses work management to optimize resource planning

Unmanaged business goals don’t work. Here’s what does.

How Asana uses work management to drive product development

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Business Plan: What It Is + How to Write One

Discover what a business plan includes and how writing one can foster your business’s development.

What is a business plan? 

Think of a business plan as a document that guides the journey to start-up and beyond. Business plans are written documents that define your business goals and the strategies you’ll use to achieve those goals. In addition to exploring the competitive environment in which the business will operate, a business plan also analyses a market and different customer segments, describes the products and services, lists business strategies for success, and outlines financial planning.  

How to write a business plan 

In the sections below, you’ll build the following components of your business plan:

Executive summary

Business description 

Products and services 

Competitor analysis 

Marketing plan and sales strategies 

Brand strategy

Financial planning

Explore each section to bring fresh inspiration and reveal new possibilities for developing your business. Depending on your format, you may adapt the sections, skip over some, or go deeper into others. Consider your first draft a foundation for your efforts and one you can revise, as needed, to account for changes in any area of your business.  

1. Executive summary 

This short section introduces the business plan as a whole to the people who will be reading it, including investors, lenders, or other members of your team. Start with a sentence or two about your business, development goals, and why it will succeed. If you are seeking funding, summarise the basics of the financial plan. 

2. Business description 

You can use this section to provide detailed information about your company and how it will operate in the marketplace. 

Mission statement: What drives your desire to start a business? What purpose are you serving? What do you hope to achieve for your business, the team, and your customers? 

Revenue streams: From what sources will your business generate revenue? Examples include product sales, service fees, subscriptions, rental fees, licence fees, and more. 

Leadership: Describe the leaders in your business, their roles and responsibilities, and your vision for building teams to perform various functions, such as graphic design, product development, or sales.  

Legal structure: If you’ve incorporated your business, include the legal structure here and the rationale behind this choice. 

3. Competitor analysis 

This section will assess potential competitors, their offers, and marketing and sales efforts. For each competitor, explore the following: 

Value proposition: What outcome or experience does this brand promise?

Products and services: How does each solve customer pain points and fulfill desires? What are the price points? 

Marketing: Which channels do competitors use to promote? What kind of content does this brand publish on these channels? What messaging does this brand use to communicate value to customers?  

Sales: What sales process or buyer’s journey does this brand lead customers through?

4. Products and services

Use this section to describe everything your business offers to its target market. For every product and service, list the following: 

The value proposition or promise to customers, in terms of how they will experience it

How the product serves customers, addresses their pain points, satisfies their desires, and improves their lives

The features or outcomes that make the product better than those of competitors

Your price points and how these compare to competitors

5. Marketing plan and sales strategies 

In this section, you’ll draw from thorough market research to describe your target market and how you will reach it. 

Who are your ideal customers?   

How can you describe this segment according to their demographics (age, ethnicity, income, location, etc.) and psychographics (beliefs, values, aspirations, lifestyle, etc.)? 

What are their daily lives like? 

What problems and challenges do they experience? 

What words, phrases, ideas, and concepts do consumers in your target market use to describe these problems when posting on social media or engaging with your competitors?  

What messaging will present your products as the best on the market? How will you differentiate messaging from competitors? 

On what marketing channels will you position your products and services?

How will you design a customer journey that delivers a positive experience at every touchpoint and leads customers to a purchase decision?

6. Brand strategy 

In this section, you will describe your business’s design, personality, values, voice, and other details that go into delivering a consistent brand experience. 

What are the values that define your brand?

What visual elements give your brand a distinctive look and feel?

How will your marketing messaging reflect a distinctive brand voice, including tone, diction, and sentence-level stylistic choices? 

How will your brand look and sound throughout the customer journey? 

Define your brand positioning statement. What will inspire your audience to choose your brand over others? What experiences and outcomes will your audience associate with your brand? 

7. Financial planning  

In this section, you will explore your business’s financial future. Suppose you are writing a traditional business plan to seek funding. In that case, this section is critical for demonstrating to lenders or investors you have a strategy for turning your business ideas into profit. For a lean start-up business plan, this section can provide a valuable exercise for planning how to invest resources and generate revenue [ 1 ].  

Use past financials and other sections of this business plan to begin your financial planning, such as your price points or sales strategies. 

How many individual products or service packages do you plan to sell over a specific period?

List your business expenses, such as subscribing to software or other services, hiring contractors or employees, purchasing physical supplies or equipment, etc.

What is your break-even point or the amount you must sell to cover all expenses?

Create a sales forecast for the next three to five years: (No. of units to sell X price for each unit) – (cost per unit X No. of units) = sales forecast

Quantify how much capital you have on hand.

When writing a traditional business plan to secure funding, you may append supporting documents, such as licences, permits, patents, letters of reference, resumes, product blueprints, brand guidelines, the industry awards you’ve received, and media mentions and appearances.

Business plan key takeaways and best practices

Remember: Creating a business plan is crucial when starting a business. You can use this document to guide your decisions and actions and even seek funding from lenders and investors. 

Keep these best practices in mind:

Your business plan should evolve as your business grows. Return to it periodically, such as quarterly or annually, to update individual sections or explore new directions your business can take.

Make sure everyone on your team has a copy of the business plan, and welcome their input as they perform their roles. 

Ask fellow entrepreneurs for feedback on your business plan and look for opportunities to strengthen it, from conducting more market and competitor research to implementing new strategies for success. 

Start your business with Coursera 

Ready to start your business? Watch this video on the Lean approach from the Entrepreneurship Specialisation on Coursera: 

Article sources

Inc. “ How to Write the Financial Section of a Business Plan ,   https://www.inc.com/guides/business-plan-financial-section.html.” Accessed April 15, 2024.

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How much does a business plan cost?

You need a business plan and are wondering how much creating one costs? 

You’ve come to the right place: in this guide, we’ll look at the factors that influence the cost of a business plan. 

This will help you figure out exactly how much you should pay for a business plan software , writer, or even a template. So, let’s get started.

In this guide:

What are the factors that influence the cost of a business plan?

How much does a business plan software cost, how much does a business plan writer cost, how much does a business plan template cost.

• The final verdict

First, let’s agree on the scope. In this guide we’ll look at the cost of putting together the business plan itself and exclude the costs associated with preparatory research. 

There are a number of things you need to do before you begin drafting your business plan: gathering data, assessing budget lines, and iterating on multiple scenarios to find the best strategy for your business. 

Needless to say, all of these things require both time and money. However, these tasks are performed before creating the business plan itself, and are therefore excluded from the scope of our guide.

Now that we know what we are solving for, let’s get to it. 

We will first look at the tasks that need to be completed to create the business plan, then we will look at tools that can be used to speed up the process, and finally at who can perform these tasks.

What jobs need to be done when drafting a business plan?

Fundamentally a business plan is composed of two main parts:

• A financial forecast which highlights the business’ funding requirements, growth prospects, potential profitability and cash generation
• A written presentation which presents the business operations and strategy in details, and provide the context needed to judge the quality of the forecast

Both of these parts are essential and contribute to the cost of creating the business plan. 

Let’s look at both of them in a bit more detail.

Creating the financial forecast for your business plan

A financial forecast helps assess the business’s viability. This section of a business plan contains at a minimum the following financial tables:

• A cash flow statement - a document that details how money comes in and goes out of the business. 
• A Profits and Loss (P&L) statement - a document that provides information about the expenses and revenues the business has generated over a given time period.
• A balance sheet - a document that details the assets and liabilities of the business at any given point in time. 

There are two ways to create your forecast. You can either opt for that old fashioned spreadsheet method or use a financial forecasting software instead.

The main driver in terms of cost when it comes to creating your forecast is the complexity of your business. 

Modeling a simple brick and mortar business is relatively straightforward. Modeling a complex business organization with multiple processes (manufacturing, storage, distribution, etc.), lines of products and services, and locations or legal entities will require more work and, therefore, increase the cost.

Writing your business plan itself

The written part of a business plan is without any doubt the most time-consuming, and contributes to the cost of creating the plan.

The time required (and, therefore, cost) to draft your business plan will first be influenced by the size of your business. 

Your business plan includes valuable strategic and financial information. If your business has multiple locations or products and services, you’ll have more information to include. This means writing about the business as a whole will take longer, require more effort, and will increase the overall cost. 

Then comes the complexity of the industry your business operates in (or/and your business model). A business plan is argumentative and needs to demonstrate that there is a viable business opportunity to be seized by you on the market. 

To do this you’ll have to provide in-depth explanations backed by market research, so that your reader can understand:

• What you sell
• Who you sell to
• Who you compete against
• Whether the market is large enough and your business correctly positioned to compete effectively 

This is quite straightforward to do if your business operates in an industry your potential readers are familiar with. If your reader is unfamiliar with your niche, however, then you will need to do more explaining. 

Adding these details will help make sure your readers - investors or banks, usually - understand that a commercial opportunity is ripe to be seized on the local market. However, this will require time and will add to the cost. 

Justifying the amount of funding you need for your business is the last factor that can increase the cost of writing your business plan. A funding requirement of $10 million will need more explanation and convincing than that of $10,000. Needless to say that it’ll also take more time and effort. 

Now that we understand the factors that influence the cost of creating the document, let’s have a look at the tools which can be used to create a business plan.

What tools can be used to write a business plan?

There are two ways to put together a business plan: 

• Using a spreadsheet and word processor

Using an all in one business plan software

Using a spreadsheet and a word processor.

Creating a business plan using a spreadsheet and a word processor was the way to go in the 1990s. 

However, this method is quickly falling out of fashion, and for good reasons: 

• It’s incredibly long and needlessly complicated
• It requires knowledge of accounting in order to create the forecast on a spreadsheets without making errors
• Investors and banks are skeptical of figures modeled by entrepreneurs themselves on spreadsheets 
• Formatting such a long document on a word processor takes time and effort

Nowadays, the way to go is to use an all in one business planning software.

Along with being affordable, using an online business plan software has numerous other benefits. 

Some of them include: 

Creating a financial forecast for your business plan without manual calculations

The financial forecast is the most technical part of the business plan. 

Working on this section without adequate knowledge of finance can lead to critical mistakes which endanger the business’s future. 

Making such a forecast using online business plan software enables you to de-risk the process as the calculations and accounting treatments are done for you by the software using best in class modeling assumptions.

Furthermore, good online business plan softwares, such as the one we offer at The Business Plan Shop , come equipped with scoring algorithms which help identify issues within a financial forecast (such as insufficient cash or inventory, for example). 

This ensures that your forecast is free of modeling errors, and provides reassurance to the readers that the numbers can be trusted. 

Getting access to instructions and examples throughout the process  

As mentioned, creating a business plan is a complex process for those who’re not familiar with creating such documents. 

Using online business plan software allows you to have access to expert guidance as you write. 

This means your business plan will be effective and completed faster than with a word processor. 

Being able to use downloadable templates to create a business plan 

Good online business plan softwares, such as the one we offer at The Business Plan Shop, come with dozens of downloadable business plan templates you can use as inspiration to write your business plan. 

Being able to look at concrete examples of business plans helps avoid writer’s block and speed up the writing process, thereby reducing the overall cost of putting the plan together.

Saving time on formatting

Good online business plan softwares, such as the one we offer at The Business Plan Shop, also come with professionally designed themes and color schemes which enable you to quickly get a stunning document matching your brand colors, while delegating the bulk of the formatting to the software.

Software also automatically integrates your forecast into the document, saving hours of manual formatting compared to using word processors. 

Now that we understand what tools can be used, let’s have a look at the last factor that influences the cost of creating the business plan: the person writing the document.

Who’s writing the business plan?

No matter what tool you use, writing a business plan is time consuming and the cost per hour of the person doing the actual writing will have a serious impact on the overall cost.

Here you have two options: either do the writing in-house using your team’s time, or outsource it to a professional business plan writer .

Outsourcing is usually much more expensive than doing the writing in-house as you have to cover the writer’s time, software, marketing costs, and profit margin. But it frees your team’s time which can be used elsewhere.

Now that we’ve covered the factors that influence the overall cost of a business plan, let’s have a look at the concrete price of the most popular options.

Need a convincing business plan?

The Business Plan Shop makes it easy to create a financial forecast to assess the potential profitability of your projects, and write a business plan that’ll wow investors.

Using online software to create a business plan is undoubtedly the best approach, and you’ll probably end up paying for software anyway - whether you pay for software yourself or the software’s cost is included in your business plan writer’s fee.

There is a common misconception that business plan software might be quite expensive. However, that’s not the case with our online business plan software. 

As a publisher, The Business Plan Shop is committed to leveling-up the playing field between small businesses and large corporations by making our solution affordable to businesses of all sizes.  

You might think we’re a bit biased when it comes to talking about our own pricing. But you’re not bound to take our word for it: see our prices for yourself .

If you’re thinking of outsourcing the writing of your plan your next option will be to hire a business plan writer. 

However, you need to know that when you hire a writer to draft a business plan, the cost of the plan will depend on the factors we’ve mentioned earlier in this guide. 

In addition, the pricing structure for writing the business plan varies among writers: 

• Hourly pricing - the writer charges a fixed hourly rate for their services. The hourly rate is multiplied by the hours they spend working on your business plan. 
• Fixed pricing - in this structure, the writer will charge a fixed price based on creating a business plan. The price may depend on the length, level of details, and complexity of the document. 

While getting a fixed price is easier for budgeting purposes, you need to remember that you get what you pay for. 

Business plan writing is a for profit activity, which means that if the price seems low, then there is probably a catch. The writer might either be inexperienced (a business student for example), or take shortcuts and not spend enough time on your document, or the result might be incomplete (only include a P&L in your forecast for example).

If you are writing a business plan to secure funding, you also need to remember that investors want their money to be used to grow your business, not wasted on consulting fees. So the amount you spend on your business plan needs to be reasonable in relation to the amount of financing you are looking for.

For example, if you are trying to secure $100k and spend $10k on business plan writing services and $10k in legal costs, then you’ve wasted 20% of the capital you are trying to secure, which will not impress investors.

Finally you also need to remember that outsourcing your plan is not a completely hands-off process. You still need to provide the writer with the inputs and the research materials needed to write your plan.

You are the only one who knows: how your business operates, what strategic and commercial actions have been planned, and how much sales are expected, and what employees are paid.

So, while we are discussing the amount spent on the actual business plan writing fee, it’s not a total cost by any means, nor a like-for-like comparison with the cost of using software discussed above.

With that in mind, let's look at how much hiring a writer would actually cost. 

How much would a business plan writer cost per hour? 

The hourly rate for a business plan writer is usually around $100 to $300. This might not seem that much at first. However, you must understand that a minimum of 20 hours is usually required to create a business plan. 

So, if your business plan writer charges $100 per hour and works for 20 hours, you’ll pay $2,000 for the document. If they charge $300 per hour, you’ll pay $6,000. 

However, these are just for simple business plans. Depending on your business size and the complexity of your industry, the total price might end-up being much higher.

Another factor is the amount of revisions needed on your business plan. It’s quite common for your plan to require several updates as you gain more information on your market conditions and feedback from lenders and investors.

When you use hourly consultants these revisions can quickly add-up as you have to pay extra for them.

How much would fixed business plan writing services cost? 

When it comes to fixed pricing, the actual cost may vary from one writer to the other. 

However, the price is generally based on their years of experience, level of expertise, and the amount of work they put in. 

Packed-based pricing service might start around $2,000. However, you’ll only get basic-level business plans at such a price. 

If you need a complex business plan with in-depth market analysis, detailed plans about business operations, and three to five years of financial projections. Package services offering such business plans might cost as much as $30,000. 

Considering these prices, it’s safe to say that you should only opt for this approach if you aim to secure a significant amount of funding. 

If you’re in the starting phases of your business, it is better to use online business plan software instead. The money you spend hiring a writer can be used for other business operations such as marketing and product development. 

Need inspiration for your business plan?

The Business Plan Shop has dozens of business plan templates that you can use to get a clear idea of what a complete business plan looks like.

The last alternative to write your business plan at a low cost is to use an Excel and Word business plan template.

Most people often think a business plan template will not cost anything at all. They’re right to a certain extent. 

You can find loads of free business plan templates on the internet, but here also: you get what you pay for. These free templates are usually either: very basic, not properly maintained and outdated, or prepared by unknown “experts” who don’t seem to grasp the basic principles of accounting.

The cost of some business plan templates might go to $300. These templates are more detailed. In addition, some of these paid templates might even have visual aesthetics making them more presentable. 

Before you opt for this approach, you need to understand that these are just templates. This means they’ll provide you with a structure and format. However, you’ll still have to do all the work yourself. 

In comparison to using online business plan software, templates are more expensive and extremely low value for money. Furthermore, using a template still requires you to have a certain level of expertise and is an approach that’s not free from error. 

The final verdict 

When it comes to creating a business plan, you have three options: online software, a business plan writer, or templates. 

Professional software usually offers the best return on investment. Templates are low value for money and should be avoided. And writers can be worth it, if you intend on raising a significant amount of capital. 

Also on The Business Plan Shop

• Business plan vs budget: what's the difference?
• Do I need a business plan? Your questions answered

Know someone who wants to create a business plan? Share this guide with them!

Founder & CEO at The Business Plan Shop Ltd

Guillaume Le Brouster is a seasoned entrepreneur and financier.

Guillaume has been an entrepreneur for more than a decade and has first-hand experience of starting, running, and growing a successful business.

Prior to being a business owner, Guillaume worked in investment banking and private equity, where he spent most of his time creating complex financial forecasts, writing business plans, and analysing financial statements to make financing and investment decisions.

Guillaume holds a Master's Degree in Finance from ESCP Business School and a Bachelor of Science in Business & Management from Paris Dauphine University.

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Small Business Trends

How to create a business plan: examples & free template.

This is the ultimate guide to creating a comprehensive and effective plan to start a business . In today’s dynamic business landscape, having a well-crafted business plan is an important first step to securing funding, attracting partners, and navigating the challenges of entrepreneurship.

This guide has been designed to help you create a winning plan that stands out in the ever-evolving marketplace. U sing real-world examples and a free downloadable template, it will walk you through each step of the process.

Whether you’re a seasoned entrepreneur or launching your very first startup, the guide will give you the insights, tools, and confidence you need to create a solid foundation for your business.

Table of Contents

How to Write a Business Plan

Embarking on the journey of creating a successful business requires a solid foundation, and a well-crafted business plan is the cornerstone. Here is the process of writing a comprehensive business plan and the main parts of a winning business plan . From setting objectives to conducting market research, this guide will have everything you need.

Executive Summary

The Executive Summary serves as the gateway to your business plan, offering a snapshot of your venture’s core aspects. This section should captivate and inform, succinctly summarizing the essence of your plan.

It’s crucial to include a clear mission statement, a brief description of your primary products or services, an overview of your target market, and key financial projections or achievements.

Think of it as an elevator pitch in written form: it should be compelling enough to engage potential investors or stakeholders and provide them with a clear understanding of what your business is about, its goals, and why it’s a promising investment.

Example: EcoTech is a technology company specializing in eco-friendly and sustainable products designed to reduce energy consumption and minimize waste. Our mission is to create innovative solutions that contribute to a cleaner, greener environment.

Our target market includes environmentally conscious consumers and businesses seeking to reduce their carbon footprint. We project a 200% increase in revenue within the first three years of operation.

Overview and Business Objectives

In the Overview and Business Objectives section, outline your business’s core goals and the strategic approaches you plan to use to achieve them. This section should set forth clear, specific objectives that are attainable and time-bound, providing a roadmap for your business’s growth and success.

It’s important to detail how these objectives align with your company’s overall mission and vision. Discuss the milestones you aim to achieve and the timeframe you’ve set for these accomplishments.

This part of the plan demonstrates to investors and stakeholders your vision for growth and the practical steps you’ll take to get there.

Example: EcoTech’s primary objective is to become a market leader in sustainable technology products within the next five years. Our key objectives include:

• Introducing three new products within the first two years of operation.
• Achieving annual revenue growth of 30%.
• Expanding our customer base to over 10,000 clients by the end of the third year.

Company Description

The Company Description section is your opportunity to delve into the details of your business. Provide a comprehensive overview that includes your company’s history, its mission statement, and its vision for the future.

Highlight your unique selling proposition (USP) – what makes your business stand out in the market. Explain the problems your company solves and how it benefits your customers.

Include information about the company’s founders, their expertise, and why they are suited to lead the business to success. This section should paint a vivid picture of your business, its values, and its place in the industry.

Example: EcoTech is committed to developing cutting-edge sustainable technology products that benefit both the environment and our customers. Our unique combination of innovative solutions and eco-friendly design sets us apart from the competition. We envision a future where technology and sustainability go hand in hand, leading to a greener planet.

Define Your Target Market

Defining Your Target Market is critical for tailoring your business strategy effectively. This section should describe your ideal customer base in detail, including demographic information (such as age, gender, income level, and location) and psychographic data (like interests, values, and lifestyle).

Elucidate on the specific needs or pain points of your target audience and how your product or service addresses these. This information will help you know your target market and develop targeted marketing strategies.

Example: Our target market comprises environmentally conscious consumers and businesses looking for innovative solutions to reduce their carbon footprint. Our ideal customers are those who prioritize sustainability and are willing to invest in eco-friendly products.

Market Analysis

The Market Analysis section requires thorough research and a keen understanding of the industry. It involves examining the current trends within your industry, understanding the needs and preferences of your customers, and analyzing the strengths and weaknesses of your competitors.

This analysis will enable you to spot market opportunities and anticipate potential challenges. Include data and statistics to back up your claims, and use graphs or charts to illustrate market trends.

This section should demonstrate that you have a deep understanding of the market in which you operate and that your business is well-positioned to capitalize on its opportunities.

Example: The market for eco-friendly technology products has experienced significant growth in recent years, with an estimated annual growth rate of 10%. As consumers become increasingly aware of environmental issues, the demand for sustainable solutions continues to rise.

Our research indicates a gap in the market for high-quality, innovative eco-friendly technology products that cater to both individual and business clients.

SWOT Analysis

A SWOT analysis in your business plan offers a comprehensive examination of your company’s internal and external factors. By assessing Strengths, you showcase what your business does best and where your capabilities lie.

Weaknesses involve an honest introspection of areas where your business may be lacking or could improve. Opportunities can be external factors that your business could capitalize on, such as market gaps or emerging trends.

Threats include external challenges your business may face, like competition or market changes. This analysis is crucial for strategic planning, as it helps in recognizing and leveraging your strengths, addressing weaknesses, seizing opportunities, and preparing for potential threats.

Including a SWOT analysis demonstrates to stakeholders that you have a balanced and realistic understanding of your business in its operational context.

• Innovative and eco-friendly product offerings.
• Strong commitment to sustainability and environmental responsibility.
• Skilled and experienced team with expertise in technology and sustainability.

Weaknesses:

• Limited brand recognition compared to established competitors.
• Reliance on third-party manufacturers for product development.

Opportunities:

• Growing consumer interest in sustainable products.
• Partnerships with environmentally-focused organizations and influencers.
• Expansion into international markets.
• Intense competition from established technology companies.
• Regulatory changes could impact the sustainable technology market.

Competitive Analysis

In this section, you’ll analyze your competitors in-depth, examining their products, services, market positioning, and pricing strategies. Understanding your competition allows you to identify gaps in the market and tailor your offerings to outperform them.

By conducting a thorough competitive analysis, you can gain insights into your competitors’ strengths and weaknesses, enabling you to develop strategies to differentiate your business and gain a competitive advantage in the marketplace.

Example: Key competitors include:

GreenTech: A well-known brand offering eco-friendly technology products, but with a narrower focus on energy-saving devices.

EarthSolutions: A direct competitor specializing in sustainable technology, but with a limited product range and higher prices.

By offering a diverse product portfolio, competitive pricing, and continuous innovation, we believe we can capture a significant share of the growing sustainable technology market.

Organization and Management Team

Provide an overview of your company’s organizational structure, including key roles and responsibilities. Introduce your management team, highlighting their expertise and experience to demonstrate that your team is capable of executing the business plan successfully.

Showcasing your team’s background, skills, and accomplishments instills confidence in investors and other stakeholders, proving that your business has the leadership and talent necessary to achieve its objectives and manage growth effectively.

Example: EcoTech’s organizational structure comprises the following key roles: CEO, CTO, CFO, Sales Director, Marketing Director, and R&D Manager. Our management team has extensive experience in technology, sustainability, and business development, ensuring that we are well-equipped to execute our business plan successfully.

Products and Services Offered

Describe the products or services your business offers, focusing on their unique features and benefits. Explain how your offerings solve customer pain points and why they will choose your products or services over the competition.

This section should emphasize the value you provide to customers, demonstrating that your business has a deep understanding of customer needs and is well-positioned to deliver innovative solutions that address those needs and set your company apart from competitors.

Example: EcoTech offers a range of eco-friendly technology products, including energy-efficient lighting solutions, solar chargers, and smart home devices that optimize energy usage. Our products are designed to help customers reduce energy consumption, minimize waste, and contribute to a cleaner environment.

Marketing and Sales Strategy

In this section, articulate your comprehensive strategy for reaching your target market and driving sales. Detail the specific marketing channels you plan to use, such as social media, email marketing, SEO, or traditional advertising.

Describe the nature of your advertising campaigns and promotional activities, explaining how they will capture the attention of your target audience and convey the value of your products or services. Outline your sales strategy, including your sales process, team structure, and sales targets.

Discuss how these marketing and sales efforts will work together to attract and retain customers, generate leads, and ultimately contribute to achieving your business’s revenue goals.

This section is critical to convey to investors and stakeholders that you have a well-thought-out approach to market your business effectively and drive sales growth.

Example: Our marketing strategy includes digital advertising, content marketing, social media promotion, and influencer partnerships. We will also attend trade shows and conferences to showcase our products and connect with potential clients. Our sales strategy involves both direct sales and partnerships with retail stores, as well as online sales through our website and e-commerce platforms.

Logistics and Operations Plan

The Logistics and Operations Plan is a critical component that outlines the inner workings of your business. It encompasses the management of your supply chain, detailing how you acquire raw materials and manage vendor relationships.

Inventory control is another crucial aspect, where you explain strategies for inventory management to ensure efficiency and reduce wastage. The section should also describe your production processes, emphasizing scalability and adaptability to meet changing market demands.

Quality control measures are essential to maintain product standards and customer satisfaction. This plan assures investors and stakeholders of your operational competency and readiness to meet business demands.

Highlighting your commitment to operational efficiency and customer satisfaction underlines your business’s capability to maintain smooth, effective operations even as it scales.

Example: EcoTech partners with reliable third-party manufacturers to produce our eco-friendly technology products. Our operations involve maintaining strong relationships with suppliers, ensuring quality control, and managing inventory.

We also prioritize efficient distribution through various channels, including online platforms and retail partners, to deliver products to our customers in a timely manner.

Financial Projections Plan

In the Financial Projections Plan, lay out a clear and realistic financial future for your business. This should include detailed projections for revenue, costs, and profitability over the next three to five years.

Ground these projections in solid assumptions based on your market analysis, industry benchmarks, and realistic growth scenarios. Break down revenue streams and include an analysis of the cost of goods sold, operating expenses, and potential investments.

This section should also discuss your break-even analysis, cash flow projections, and any assumptions about external funding requirements.

By presenting a thorough and data-backed financial forecast, you instill confidence in potential investors and lenders, showcasing your business’s potential for profitability and financial stability.

This forward-looking financial plan is crucial for demonstrating that you have a firm grasp of the financial nuances of your business and are prepared to manage its financial health effectively.

Example: Over the next three years, we expect to see significant growth in revenue, driven by new product launches and market expansion. Our financial projections include:

• Year 1: $1.5 million in revenue, with a net profit of $200,000.
• Year 2: $3 million in revenue, with a net profit of $500,000.
• Year 3: $4.5 million in revenue, with a net profit of $1 million.

These projections are based on realistic market analysis, growth rates, and product pricing.

Income Statement

The income statement , also known as the profit and loss statement, provides a summary of your company’s revenues and expenses over a specified period. It helps you track your business’s financial performance and identify trends, ensuring you stay on track to achieve your financial goals.

Regularly reviewing and analyzing your income statement allows you to monitor the health of your business, evaluate the effectiveness of your strategies, and make data-driven decisions to optimize profitability and growth.

Example: The income statement for EcoTech’s first year of operation is as follows:

• Revenue: $1,500,000
• Cost of Goods Sold: $800,000
• Gross Profit: $700,000
• Operating Expenses: $450,000
• Net Income: $250,000

This statement highlights our company’s profitability and overall financial health during the first year of operation.

Cash Flow Statement

A cash flow statement is a crucial part of a financial business plan that shows the inflows and outflows of cash within your business. It helps you monitor your company’s liquidity, ensuring you have enough cash on hand to cover operating expenses, pay debts, and invest in growth opportunities.

By including a cash flow statement in your business plan, you demonstrate your ability to manage your company’s finances effectively.

Example:  The cash flow statement for EcoTech’s first year of operation is as follows:

Operating Activities:

• Depreciation: $10,000
• Changes in Working Capital: -$50,000
• Net Cash from Operating Activities: $210,000

Investing Activities:

•  Capital Expenditures: -$100,000
• Net Cash from Investing Activities: -$100,000

Financing Activities:

• Proceeds from Loans: $150,000
• Loan Repayments: -$50,000
• Net Cash from Financing Activities: $100,000
• Net Increase in Cash: $210,000

This statement demonstrates EcoTech’s ability to generate positive cash flow from operations, maintain sufficient liquidity, and invest in growth opportunities.

Tips on Writing a Business Plan

1. Be clear and concise: Keep your language simple and straightforward. Avoid jargon and overly technical terms. A clear and concise business plan is easier for investors and stakeholders to understand and demonstrates your ability to communicate effectively.

2. Conduct thorough research: Before writing your business plan, gather as much information as possible about your industry, competitors, and target market. Use reliable sources and industry reports to inform your analysis and make data-driven decisions.

3. Set realistic goals: Your business plan should outline achievable objectives that are specific, measurable, attainable, relevant, and time-bound (SMART). Setting realistic goals demonstrates your understanding of the market and increases the likelihood of success.

4. Focus on your unique selling proposition (USP): Clearly articulate what sets your business apart from the competition. Emphasize your USP throughout your business plan to showcase your company’s value and potential for success.

5. Be flexible and adaptable: A business plan is a living document that should evolve as your business grows and changes. Be prepared to update and revise your plan as you gather new information and learn from your experiences.

6. Use visuals to enhance understanding: Include charts, graphs, and other visuals to help convey complex data and ideas. Visuals can make your business plan more engaging and easier to digest, especially for those who prefer visual learning.

7. Seek feedback from trusted sources: Share your business plan with mentors, industry experts, or colleagues and ask for their feedback. Their insights can help you identify areas for improvement and strengthen your plan before presenting it to potential investors or partners.

FREE Business Plan Template

To help you get started on your business plan, we have created a template that includes all the essential components discussed in the “How to Write a Business Plan” section. This easy-to-use template will guide you through each step of the process, ensuring you don’t miss any critical details.

The template is divided into the following sections:

• Mission statement
• Business Overview
• Key products or services
• Target market
• Financial highlights
• Company goals
• Strategies to achieve goals
• Measurable, time-bound objectives
• Company History
• Mission and vision
• Unique selling proposition
• Demographics
• Psychographics
• Pain points
• Industry trends
• Customer needs
• Competitor strengths and weaknesses
• Opportunities
• Competitor products and services
• Market positioning
• Pricing strategies
• Organizational structure
• Key roles and responsibilities
• Management team backgrounds
• Product or service features
• Competitive advantages
• Marketing channels
• Advertising campaigns
• Promotional activities
• Sales strategies
• Supply chain management
• Inventory control
• Production processes
• Quality control measures
• Projected revenue
• Assumptions
• Cash inflows
• Cash outflows
• Net cash flow

What is a Business Plan?

A business plan is a strategic document that outlines an organization’s goals, objectives, and the steps required to achieve them. It serves as a roadmap as you start a business , guiding the company’s direction and growth while identifying potential obstacles and opportunities.

Typically, a business plan covers areas such as market analysis, financial projections, marketing strategies, and organizational structure. It not only helps in securing funding from investors and lenders but also provides clarity and focus to the management team.

A well-crafted business plan is a very important part of your business startup checklist because it fosters informed decision-making and long-term success.

Why You Should Write a Business Plan

Understanding the importance of a business plan in today’s competitive environment is crucial for entrepreneurs and business owners. Here are five compelling reasons to write a business plan:

• Attract Investors and Secure Funding : A well-written business plan demonstrates your venture’s potential and profitability, making it easier to attract investors and secure the necessary funding for growth and development. It provides a detailed overview of your business model, target market, financial projections, and growth strategies, instilling confidence in potential investors and lenders that your company is a worthy investment.
• Clarify Business Objectives and Strategies : Crafting a business plan forces you to think critically about your goals and the strategies you’ll employ to achieve them, providing a clear roadmap for success. This process helps you refine your vision and prioritize the most critical objectives, ensuring that your efforts are focused on achieving the desired results.
• Identify Potential Risks and Opportunities : Analyzing the market, competition, and industry trends within your business plan helps identify potential risks and uncover untapped opportunities for growth and expansion. This insight enables you to develop proactive strategies to mitigate risks and capitalize on opportunities, positioning your business for long-term success.
• Improve Decision-Making : A business plan serves as a reference point so you can make informed decisions that align with your company’s overall objectives and long-term vision. By consistently referring to your plan and adjusting it as needed, you can ensure that your business remains on track and adapts to changes in the market, industry, or internal operations.
• Foster Team Alignment and Communication : A shared business plan helps ensure that all team members are on the same page, promoting clear communication, collaboration, and a unified approach to achieving the company’s goals. By involving your team in the planning process and regularly reviewing the plan together, you can foster a sense of ownership, commitment, and accountability that drives success.

What are the Different Types of Business Plans?

In today’s fast-paced business world, having a well-structured roadmap is more important than ever. A traditional business plan provides a comprehensive overview of your company’s goals and strategies, helping you make informed decisions and achieve long-term success. There are various types of business plans, each designed to suit different needs and purposes. Let’s explore the main types:

• Startup Business Plan: Tailored for new ventures, a startup business plan outlines the company’s mission, objectives, target market, competition, marketing strategies, and financial projections. It helps entrepreneurs clarify their vision, secure funding from investors, and create a roadmap for their business’s future. Additionally, this plan identifies potential challenges and opportunities, which are crucial for making informed decisions and adapting to changing market conditions.
• Internal Business Plan: This type of plan is intended for internal use, focusing on strategies, milestones, deadlines, and resource allocation. It serves as a management tool for guiding the company’s growth, evaluating its progress, and ensuring that all departments are aligned with the overall vision. The internal business plan also helps identify areas of improvement, fosters collaboration among team members, and provides a reference point for measuring performance.
• Strategic Business Plan: A strategic business plan outlines long-term goals and the steps to achieve them, providing a clear roadmap for the company’s direction. It typically includes a SWOT analysis, market research, and competitive analysis. This plan allows businesses to align their resources with their objectives, anticipate changes in the market, and develop contingency plans. By focusing on the big picture, a strategic business plan fosters long-term success and stability.
• Feasibility Business Plan: This plan is designed to assess the viability of a business idea, examining factors such as market demand, competition, and financial projections. It is often used to decide whether or not to pursue a particular venture. By conducting a thorough feasibility analysis, entrepreneurs can avoid investing time and resources into an unviable business concept. This plan also helps refine the business idea, identify potential obstacles, and determine the necessary resources for success.
• Growth Business Plan: Also known as an expansion plan, a growth business plan focuses on strategies for scaling up an existing business. It includes market analysis, new product or service offerings, and financial projections to support expansion plans. This type of plan is essential for businesses looking to enter new markets, increase their customer base, or launch new products or services. By outlining clear growth strategies, the plan helps ensure that expansion efforts are well-coordinated and sustainable.
• Operational Business Plan: This type of plan outlines the company’s day-to-day operations, detailing the processes, procedures, and organizational structure. It is an essential tool for managing resources, streamlining workflows, and ensuring smooth operations. The operational business plan also helps identify inefficiencies, implement best practices, and establish a strong foundation for future growth. By providing a clear understanding of daily operations, this plan enables businesses to optimize their resources and enhance productivity.
• Lean Business Plan: A lean business plan is a simplified, agile version of a traditional plan, focusing on key elements such as value proposition, customer segments, revenue streams, and cost structure. It is perfect for startups looking for a flexible, adaptable planning approach. The lean business plan allows for rapid iteration and continuous improvement, enabling businesses to pivot and adapt to changing market conditions. This streamlined approach is particularly beneficial for businesses in fast-paced or uncertain industries.
• One-Page Business Plan: As the name suggests, a one-page business plan is a concise summary of your company’s key objectives, strategies, and milestones. It serves as a quick reference guide and is ideal for pitching to potential investors or partners. This plan helps keep teams focused on essential goals and priorities, fosters clear communication, and provides a snapshot of the company’s progress. While not as comprehensive as other plans, a one-page business plan is an effective tool for maintaining clarity and direction.
• Nonprofit Business Plan: Specifically designed for nonprofit organizations, this plan outlines the mission, goals, target audience, fundraising strategies, and budget allocation. It helps secure grants and donations while ensuring the organization stays on track with its objectives. The nonprofit business plan also helps attract volunteers, board members, and community support. By demonstrating the organization’s impact and plans for the future, this plan is essential for maintaining transparency, accountability, and long-term sustainability within the nonprofit sector.
• Franchise Business Plan: For entrepreneurs seeking to open a franchise, this type of plan focuses on the franchisor’s requirements, as well as the franchisee’s goals, strategies, and financial projections. It is crucial for securing a franchise agreement and ensuring the business’s success within the franchise system. This plan outlines the franchisee’s commitment to brand standards, marketing efforts, and operational procedures, while also addressing local market conditions and opportunities. By creating a solid franchise business plan, entrepreneurs can demonstrate their ability to effectively manage and grow their franchise, increasing the likelihood of a successful partnership with the franchisor.

Using Business Plan Software

Creating a comprehensive business plan can be intimidating, but business plan software can streamline the process and help you produce a professional document. These tools offer a number of benefits, including guided step-by-step instructions, financial projections, and industry-specific templates. Here are the top 5 business plan software options available to help you craft a great business plan.

1. LivePlan

LivePlan is a popular choice for its user-friendly interface and comprehensive features. It offers over 500 sample plans, financial forecasting tools, and the ability to track your progress against key performance indicators. With LivePlan, you can create visually appealing, professional business plans that will impress investors and stakeholders.

2. Upmetrics

Upmetrics provides a simple and intuitive platform for creating a well-structured business plan. It features customizable templates, financial forecasting tools, and collaboration capabilities, allowing you to work with team members and advisors. Upmetrics also offers a library of resources to guide you through the business planning process.

Bizplan is designed to simplify the business planning process with a drag-and-drop builder and modular sections. It offers financial forecasting tools, progress tracking, and a visually appealing interface. With Bizplan, you can create a business plan that is both easy to understand and visually engaging.

Enloop is a robust business plan software that automatically generates a tailored plan based on your inputs. It provides industry-specific templates, financial forecasting, and a unique performance score that updates as you make changes to your plan. Enloop also offers a free version, making it accessible for businesses on a budget.

5. Tarkenton GoSmallBiz

Developed by NFL Hall of Famer Fran Tarkenton, GoSmallBiz is tailored for small businesses and startups. It features a guided business plan builder, customizable templates, and financial projection tools. GoSmallBiz also offers additional resources, such as CRM tools and legal document templates, to support your business beyond the planning stage.

Business Plan FAQs

What is a good business plan.

A good business plan is a well-researched, clear, and concise document that outlines a company’s goals, strategies, target market, competitive advantages, and financial projections. It should be adaptable to change and provide a roadmap for achieving success.

What are the 3 main purposes of a business plan?

The three main purposes of a business plan are to guide the company’s strategy, attract investment, and evaluate performance against objectives. Here’s a closer look at each of these:

• It outlines the company’s purpose and core values to ensure that all activities align with its mission and vision.
• It provides an in-depth analysis of the market, including trends, customer needs, and competition, helping the company tailor its products and services to meet market demands.
• It defines the company’s marketing and sales strategies, guiding how the company will attract and retain customers.
• It describes the company’s organizational structure and management team, outlining roles and responsibilities to ensure effective operation and leadership.
• It sets measurable, time-bound objectives, allowing the company to plan its activities effectively and make strategic decisions to achieve these goals.
• It provides a comprehensive overview of the company and its business model, demonstrating its uniqueness and potential for success.
• It presents the company’s financial projections, showing its potential for profitability and return on investment.
• It demonstrates the company’s understanding of the market, including its target customers and competition, convincing investors that the company is capable of gaining a significant market share.
• It showcases the management team’s expertise and experience, instilling confidence in investors that the team is capable of executing the business plan successfully.
• It establishes clear, measurable objectives that serve as performance benchmarks.
• It provides a basis for regular performance reviews, allowing the company to monitor its progress and identify areas for improvement.
• It enables the company to assess the effectiveness of its strategies and make adjustments as needed to achieve its objectives.
• It helps the company identify potential risks and challenges, enabling it to develop contingency plans and manage risks effectively.
• It provides a mechanism for evaluating the company’s financial performance, including revenue, expenses, profitability, and cash flow.

Can I write a business plan by myself?

Yes, you can write a business plan by yourself, but it can be helpful to consult with mentors, colleagues, or industry experts to gather feedback and insights. There are also many creative business plan templates and business plan examples available online, including those above.

We also have examples for specific industries, including a using food truck business plan , salon business plan , farm business plan , daycare business plan , and restaurant business plan .

Is it possible to create a one-page business plan?

Yes, a one-page business plan is a condensed version that highlights the most essential elements, including the company’s mission, target market, unique selling proposition, and financial goals.

How long should a business plan be?

A typical business plan ranges from 20 to 50 pages, but the length may vary depending on the complexity and needs of the business.

What is a business plan outline?

A business plan outline is a structured framework that organizes the content of a business plan into sections, such as the executive summary, company description, market analysis, and financial projections.

What are the 5 most common business plan mistakes?

The five most common business plan mistakes include inadequate research, unrealistic financial projections, lack of focus on the unique selling proposition, poor organization and structure, and failure to update the plan as circumstances change.

What questions should be asked in a business plan?

A business plan should address questions such as: What problem does the business solve? Who is the specific target market ? What is the unique selling proposition? What are the company’s objectives? How will it achieve those objectives?

What’s the difference between a business plan and a strategic plan?

A business plan focuses on the overall vision, goals, and tactics of a company, while a strategic plan outlines the specific strategies, action steps, and performance measures necessary to achieve the company’s objectives.

How is business planning for a nonprofit different?

Nonprofit business planning focuses on the organization’s mission, social impact, and resource management, rather than profit generation. The financial section typically includes funding sources, expenses, and projected budgets for programs and operations.

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Learn from the business planning experts, resources to help you get ahead, cost structure, table of contents.

Cost Structure refers to the composition and classification of costs involved in running a business. It is an integral part of a company’s business model and financial planning, detailing the various expenses incurred during business operations.

A company’s cost structure categorizes costs as fixed, variable, semi-variable, direct, and indirect, each impacting its financial health and pricing strategies.

Components of Cost Structure

• Fixed Costs : Expenses that remain constant regardless of the level of production or sales. Examples include rent, insurance premiums, and salaries of permanent staff.
• Variable Costs : Costs that vary in proportion to business activity levels. This includes the cost of goods sold (COGS), shipping fees, and sales commissions.
• Semi-Variable Costs : Expenses containing both fixed and variable components, such as utilities or wages for hourly workers.
• Direct Costs : Costs directly associated with the production of goods or services, like raw materials and direct labor.
• Indirect Costs : Expenses not directly linked to production but essential for general operations, including administrative and marketing costs.

Strategic Consideration for Startups

Startups must carefully examine their cost structure to identify potential cost savings that do not compromise product quality or customer experience, while still ensuring that prices cover costs and contribute to profitability.

Adaptation and Efficiency

As a startup grows, its cost structure may evolve, necessitating regular reviews and adjustments to maintain efficiency. For example, implementing cost control measures, embracing automation, and renegotiating supplier contracts can help optimize costs. A lean and well-managed cost structure can provide a competitive advantage, particularly in markets sensitive to price fluctuations.

Frequently Asked Questions

• How does a startup’s cost structure affect its business model?

The cost structure directly impacts a startup’s profitability, cash flow, and pricing strategy. A startup with a high variable cost structure might scale more efficiently but face greater risks during demand fluctuations, while one with higher fixed costs might have more predictable expenses but lower margins.

• Why is it important for startups to regularly review their cost structure?

Regular review of the cost structure allows startups to adapt to changing market conditions, optimize expenses, and explore new ways to increase efficiency and profitability. As the business scales, certain costs can be renegotiated or reduced, thereby impacting the bottom line positively.

• Can the cost structure influence a startup’s funding requirements?

The cost structure can significantly influence a startup’s funding needs. A business with substantial upfront fixed costs may require more initial capital, while one with variable costs might need funding that aligns more closely with growth or production scale.

Related Terms

Also see: Fixed Costs

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How to Write a Competitor Analysis for a Business Plan (with AI in 2023)

Competitor analysis is a critical component of any business plan. It helps you understand the landscape of your industry, identify opportunities for growth and differentiation, and craft strategies that take advantage of your competitors' weaknesses.

Here's a step-by-step guide on how to conduct a comprehensive competitor analysis, including how to leverage AI tools like Bizway to make the process more efficient and effective.

Step-by-Step Guide to Performing a Competitor Analysis

1. identify your competitors.

Understanding your competitive landscape begins with pinpointing who your direct and indirect competitors are.

Points to Consider

• Direct Competitors : Those who offer similar products/services in the same market.
• Indirect Competitors : Businesses targeting your customer base with different offerings.
• Utilize market research and customer feedback to list competitors.
• Identify geographical considerations - local, regional, or global competitors.

2. Analyze Their Products/Services

A thorough examination of competitors’ offerings unveils potential areas for differentiation and enhancement in your product/service line.

• Feature comparisons.
• Pricing structures.
• Unique Selling Propositions (USPs).
• Adopt a customer-centric approach to understand how consumers perceive competitors’ offerings.
• Identify gaps in their product/service lines that you could explore.

3. Assess Their Marketing Strategy

Understanding competitors’ marketing approaches aids in crafting a superior, data-driven marketing strategy.

• Target audience.
• Key messages and value propositions.
• Channel effectiveness and presence.
• Use social listening tools to gauge their social media effectiveness.
• Analyze the SEO performance of competitors’ websites.

4. Examine Their Sales Strategy

Investigating sales channels and tactics employed by competitors reveals market penetration strategies and potential areas for diversification.

• Distribution channels.
• Pricing and sales tactics.
• Customer relationship management.
• Secret shop to observe sales tactics and customer experiences.
• Review customer feedback on their purchasing experience.

5. Analyze Their Strengths and Weaknesses

Identifying what competitors excel in and fall short on enables strategic decision-making in exploiting market opportunities.

• Operational efficiency.
• Customer service quality.
• Brand reputation and loyalty.
• Conduct a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) for each competitor.
• Leverage customer reviews and testimonials to gauge reputation.

Using AI for Competitor Analysis

Automated data collection.

AI automates the harvesting of data from myriad sources, ensuring robust research while saving time.

• Use AI tools to scrape and aggregate data from competitors' websites, social media, and customer review platforms.
• Ensure the data is categorized and stored systematically for easy analysis.

Real-Time Updates

AI provides a competitive edge by monitoring and reporting real-time updates on competitor activities.

• Set up AI monitoring for specific competitor activity: product launches, PR releases, or marketing campaigns.
• Ensure to leverage real-time data to inform swift strategic adjustments.

Predictive Analytics

Predictive analytics via AI deciphers patterns and anticipates future competitor moves, positioning your business proactively.

• Leverage AI to analyze historical data for predicting future trends.
• Utilize these insights to anticipate and formulate preemptive strategies.

Using Bizway for Competitor Analysis and Business Planning

One such AI tool that can revolutionize your competitor analysis process is Bizway . Bizway is an AI-powered business planning and research app that can help you research your competitors and write your entire competitor analysis with just a few clicks. Moreover, Bizway can assist you in writing your entire business plan, saving you time and providing you with expert-level planning documents.

With Bizway, you can automate the process of generating clear, concise planning docs across all areas of business, from an SEO Content Plan to User Onboarding Plan. It also helps fill knowledge gaps in areas of business you're not well-versed in.

So, whether you're a solopreneur, a small business owner, or an aspiring entrepreneur still in school, Bizway is the AI assistant you need to take your business planning to the next level.

Gerrard + Bizway AI Assistant

Start automating your business growth, today⚡

Create your first AI assistant & project in minutes.⚡

Bizway is brought to you by Landmark Labs Ltd.

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How Much Do Business Plan Writers Cost?

When you’re starting or growing a business, it’s important to have a clear plan in place. Writing a business plan can help you outline your goals and sales strategies, and it can be a valuable tool when seeking funding from potential investors such as venture capitalists or a bank loan. 

If you don’t have time to write your own business plan, or if you need help getting started, professional business plan writing services can be a great option. But, how much do these services cost? And is it worth the investment? Let’s take a closer look.

How Much Should I Pay For a Business Plan Writing Service?

Professional business plan writers and consultants generally charge between $2,000 and $25,000. However, the cost largely depends on the required quality of your plan, the complexity of your business plan, and the length of the document. Professional business plans for very small companies may only require a few thousand dollars to be written, while more complex business plans for larger, growing companies can easily cost over ten thousand dollars.

There are also private consultants who will write or edit your business plan on an hourly fee basis. Fees can range from $50 to $300 per hour or more, depending on the consultant and the complexity of your business plan.

Whoever you choose to get started with your business plan, be sure to consider what’s included in your service. At the very least, you should expect:

• Comprehensive business plan including an executive summary, market analysis, marketing plan, financial plan with 3-5 years of financial projections, and other essential components required by potential investors
• Customization based on your business model and specific to your business needs
• Well-researched business plan based on relevant industry information and a thorough competitive analysis

There are several companies out there that offer complete business plan writing services. However, the quality of their work can vary dramatically. If you’re considering hiring outside help to write your business plan, choose carefully.

It’s important to remember that you get what you pay for when it comes to these types of services. If you go with a cheap plan writer, you run the risk of ending up with a low-quality business plan. If your business plan isn’t strong and professional-looking, it may be harder for you to get funding or attract investors.

Looking for a Business Plan Writer?

You’ve come to the right place!  Since Growthink was founded in 1999, we have provided business plan writing services for thousands of clients including startups, small business owners, nonprofit organizations and mid to large-sized companies. 

We understand that writing a business plan can be a time-consuming process for many entrepreneurs.  Hiring a business plan writer will allow you to quickly and expertly create a custom business plan.

 Expert Team of Business Plan Writers

 Fully Customized Business Plans

 Market & Competitor Research

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 Strategic Consulting For Growth & Funding

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Call us at (800) 216-3710 or complete the form below and one of our business plan writers will reach out to you to schedule a time to speak about your business plan needs.

You can learn more about our business plan consulting services here

What Factors Impact Business Plan Pricing?

Some things that impact business planning services pricing include:

• Length – Longer, more complex business plans will cost more than shorter business plans.
• Company Size – A business plan for a large or complicated company can be more expensive to write.
• Level of Expertise – Smaller companies may opt to hire less experienced writers who charge lower prices, while larger, well-established companies choose to work with high-quality professionals who charge higher rates. You can’t expect a less experienced writer to help you achieve your goals (funding, growth) for your business plan.
• Turnaround Time – Generally, shorter turnaround times mean increased prices. Typically it will take 3-4 weeks to write a quality business plan.
• Additional Services – Some companies offer additional services, such as business plan presentation and pitch deck editing and support. These can cost extra.

To really get your business off the ground, it’s important to have a business plan in place that has been written by someone with the expertise to put together a successful business plan. A professional business plan consultant is an excellent investment for increasing your chances of securing the funds you need to start and/or grow your business. However, it’s important to do your research and choose carefully when you’re ready to hire.

Who Can I Hire To Write My Business Plan?

When choosing a business plan writer or consulting firm, it’s important to look for a company with significant business experience and proven expertise in business plan development. Look for companies that have been around for at least five years and do business plan writing on a regular basis. They should also be able to provide references from other companies that they’ve worked with.

A Business Plan Writing Company or Consultant

When hiring a business plan writing service , you’ll have two primary options. You can opt to work with a single writer or a dedicated team of experts who will be responsible for the entire project. The price of the service may vary depending on which option you choose.

A business plan writer typically costs less than an entire team, but it’s important to keep in mind that you may have less control over the outcome. The upside is that your business plan will be written by an expert with a deep understanding of the writing process.

When choosing this route, you should ask for references and examples of previous work. Before hiring any business plan writer, be sure they have the proper credentials and experience to meet your needs. You should also ask about any fees associated with revisions or updates.

Many businesses choose to work with a business plan consulting firm that offers a collaborative team of experts. This type of company will give you the best of both worlds. You’ll be able to utilize the knowledge and expertise of all the experts involved in the project, while still retaining control over the direction and vision of your business plan.

If you’re trying to determine how much it will cost to work with a business plan writing service, take some time to explore all of your options before making a final decision. You should consider both pricing models as well as the qualifications offered by the various service providers in your area. Doing so will ensure you find the most qualified choice for your business planning needs.

You Can Write It Yourself

If you are a newer entrepreneur or business owner or you are trying to save money, there are several free resources available online to help you write your business plan. The Small Business Administration (SBA) and your local Chamber of Commerce offer business plan services, workshops, or courses that can help you get started. Using a business plan template is a great way to quickly and easily complete your plan, especially if you are unfamiliar with the business planning process.

Some business owners are comfortable writing business plans without any outside help. This option offers you complete control over the process, but it typically takes more time than you have to spare. For that reason, not writing your own plan is usually recommended for experienced business owners, even those with plenty of business plan writing experience.

In most cases, experienced business owners who write their own business plans will have a better idea of what elements are needed and how they should be presented. However, it can still take considerable time to compile all the necessary information into a cohesive business plan that meets your audience’s needs. And it’s one thing to write a business plan; it’s another to write a business plan that gets investors or lenders to write you a large funding check.

A Combination of Business Planning Services

If your budget doesn’t allow you to hire a comprehensive business plan service, combining outside services with writing your own business plan may be the best option. This approach gives you complete control over the process, while still allowing you to benefit from an expert business plan writer’s advice. It is also a great option for entrepreneurs who don’t have time to write their plan but aren’t quite ready to hire someone else to do it either.

Other business services that could help you include:

• Market Research – Conducting thorough market research can help you determine which business opportunities are viable. Experienced consultants can help you identify your target customer so you can design the right marketing strategy to reach them.
• Copywriting Assistance – Many entrepreneurs have a great product or idea, but lack the writing skills needed to effectively advertise it in their business plans or online marketing materials. A business plan copywriter can help you create a compelling marketing message that resonates with your target audience.
• Startup / Growth Opportunities – If you’re thinking about starting a business or expanding your established business, it’s important to consider all of the potential opportunities before diving into something that may not be feasible for your current situation. A business plan consultant can help you identify what makes your business idea unique and how you can capitalize on those opportunities.
• Business Plan Review – Once you’ve completed your business plan, it’s important to have it reviewed by an expert. They can identify any gaps or mistakes in logic that could affect how potential lenders or investors perceive your business idea.

As with any decision affecting your company’s future, you should take the time to explore all of your options before committing to a specific service provider. The goal is not only to find the best fit for your budget and needs but also to find a business plan consulting service that can meet your expectations and deliver quality content on time and within budget.

Is It Worth It To Use a Professional Business Plan Writing Service?

As with anything else, you’ll get what you pay for. If you are short on time or don’t have the writing skills required to write a business plan, it may be worth considering a professional writing service. These services can help you complete the necessary research and planning to get a comprehensive business plan written for your company.

How Growthink Can Help Your Business

Since 1999, Growthink has developed thousands of business plans for entrepreneurs and business owners to start and/or grow their businesses. From small business owners to Fortune 500 companies, we have provided a variety of business plan services to meet the needs of each client.

Our business planning services include:

• Business Plan Consultants – Our experienced business plan consulting team has helped numerous businesses from small businesses to multi-million dollar corporations identify new opportunities and develop their business plans using existing information where possible, or by conducting new research as needed.
• Business Plan Writing Services – Our business plan writers are experienced professionals who are committed to providing you with a business plan that delivers results. Depending on your needs, our business writers can either help you complete the research and writing process, or write your business plan for you from start to finish.
• Done For You Market Research – Our market research team can conduct independent market research for your business through access to several market research databases. Utilize this research to help you write a business plan that is more in-depth and gives you a distinct advantage over competitors in your industry.
• Private Placement Memorandums – Growthink’s experienced business consultants can help you prepare a private placement memorandum (PPM) that is tailored to the unique needs of your business. PPMs are used to help businesses raise capital from accredited investors.
• Growthink’s Ultimate Business Plan Template – Our simple business plan template is available in MS Word and when completed can be sent to investors and lenders in Adobe PDF format. Use this business plan template to help you focus your business concept on the information that is most relevant for lenders and investors, while also providing a flexible foundation for future growth.
• Business Plan Writing Help Center – We have a wide variety of free resources for business planning on our website. Use our selection of 200+ business plan examples to help you write a business plan specific to your industry or learn more from our selection of business planning and funding articles.

No matter what product or service you choose, we wish you success in your business venture

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Tesla Will Lay Off More Than 10% of Workers

Along with the departure of two senior executives, the cuts added to signs of turmoil at the electric car company.

By Jack Ewing

Signs of turmoil at Tesla multiplied on Monday after the electric car company told employees it would lay off more than 10 percent of the work force to cut costs and two senior executives resigned.

The job cuts, amounting to about 14,000 people, come as the company faces increasing competition and declining sales. The management changes and layoffs are a reminder of the unpredictability of Elon Musk, Tesla’s chief executive, at a critical time for the company.

Mr. Musk has not outlined a plan to reverse a decline in car sales, and he appears focused on long-shot ventures such as a self-driving taxi, rather than new models that would help Tesla compete with cars being introduced by established carmakers and new rivals from China.

“As we prepare the company for the next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity,” Mr. Musk told employees in a Monday morning email, a copy of which was reviewed by The New York Times.

“There is nothing I hate more, but it must be done,” he wrote.

Hours after that email, Drew Baglino, a senior vice president who has played a big role in the company’s rise from start-up to dominant electric car maker, said he had resigned.

“I made the difficult decision to move on from Tesla after 18 years yesterday,” Mr. Baglino said in a post on X, the social media site. Mr. Baglino is one of only three managers besides Mr. Musk listed as a top executive on the company’s website . His longevity was unusual at a company known for high management turnover.

Mr. Baglino may have been blamed for some of Tesla’s recent troubles, said Gary Black, managing partner of the Future Fund, an investment firm. “Someone has to take the fall for the sharp deceleration in deliveries growth, near record inventories, and declining margins and it wasn’t going to be Elon,” Mr. Black said on X.

Tesla also appeared to be losing an executive key to winning regulatory approval for self-driving technology. Rohan Patel, a former aide to President Barack Obama who was Tesla’s head of policy and business development, tacitly confirmed reports that he was leaving. In a post on X, Mr. Patel thanked his co-workers and Mr. Musk for “the past eight years at Tesla.”

“My plans are to be a recess monitor for my second grade daughter, practice my violin, go to a bunch of bucket list sporting events and take my very patient wife on some long intended travel,” Mr. Patel said.

Investors often welcome job cuts because they can lead to higher profits. But that was not the case Monday, with Tesla shares ending the day down more than 5 percent.

Tesla regularly culls its work force to remove employees whose performance managers consider weak, but the numbers are typically smaller. “This is something Elon and Tesla have consistently done throughout his career,” said Scott Acheychek, chief executive of REX Shares, which offers funds investors use to bet on or against Tesla’s stock. “Ten percent is pretty big,” Mr. Acheychek added.

Mr. Musk’s email to employees was earlier reported by Electrek, an online news site, and Handelsblatt, a German business newspaper.

Mr. Musk did not indicate where the cuts would be made. Many of Tesla’s workers are based at four large car factories in Fremont, Calif., Austin, Texas, and Shanghai and near Berlin. Tesla also has a factory in Buffalo that produces charging equipment and a factory near Reno, Nev., that makes batteries.

The layoffs may help the United Automobile Workers union’s efforts to organize Tesla employees in the United States. The company’s workers may be more open to the union if they believe that representation would give them greater job security. Workers at a Volkswagen factory in Tennessee will vote this week on joining the U.A.W., and Mercedes-Benz workers in Alabama will vote next month.

Mr. Musk’s many other ventures, and his penchant for making polarizing political statements, have raised questions about his focus on managing Tesla. Wall Street is increasingly concerned about the company: Tesla’s share price has lost about one-third of its value this year.

Many investors had expressed hope that Tesla would revive flagging sales by introducing a car that would sell for about $25,000 as early as next year, increasing the number of people who could afford the company’s cars and responding to competition from Chinese companies that are already selling electric cars for as little as half that price tag.

Mr. Musk cast doubt on those plans by announcing this month that Tesla would unveil a Robotaxi in August. The self-driving taxi is seen as a long shot, in part because even the most advanced systems available today sometimes make glaring mistakes. In addition, federal and state regulators will have to sign off before Tesla can put such taxis on the road.

This month, Tesla reported a decline in sales that caught investors off guard . The company said it delivered 387,000 cars worldwide in the first quarter, down 8.5 percent from the year before. It was the first time Tesla’s quarterly sales had fallen on a year over year basis since the start of the pandemic in 2020.

The company slashed prices significantly over the course of 2023 to increase demand, which has reduced the profit Tesla makes on each car. Last week, Tesla reduced the price of its most advanced driver-assistance software to $99 a month from $199. But price cuts appear to be losing their effectiveness. Tesla will announce its financial results for the first quarter on April 23.

Rivals like BYD of China, BMW of Germany, and Kia and Hyundai Motor of South Korea reported increases in electric vehicle sales for the same period, suggesting that slower overall demand for battery-powered models was not the only explanation for Tesla’s problems.

Established companies are closing the gap with Tesla on battery technology, and have been building new assembly lines to achieve the cost savings made possible by mass production. Honda plans to begin producing electric vehicles at a factory in Marysville, Ohio, next year.

Hyundai will begin producing electric cars at a new factory in Georgia in October, José Muñoz, the president and global chief operating officer of Hyundai Motor, said in an interview last month. Hyundai will also begin allowing customers to buy cars on Amazon, an answer to Tesla’s practice of selling cars online.

Mr. Muñoz said that customers had been willing to pay more for Hyundai electric cars than they would for comparable Teslas. “At the beginning, Tesla was premium,” he said. “Now we’re premium .”

Jason Karaian and Melissa Eddy contributed reporting.

Jack Ewing writes about the auto industry with an emphasis on electric vehicles. More about Jack Ewing

The World of Elon Musk

The billionaire’s portfolio includes the world’s most valuable automaker, an innovative rocket company and plenty of drama..

A $47 Billion Pay Deal: Despite   facing criticism that Tesla is overly beholden to Elon Musk , its board of directors said that the company would essentially give him everything he wanted, including the biggest pay package in corporate history.

Tesla: The company has agreed to recall nearly 4,000  of its Cybertruck pickups to fix an accelerator pedal that can get stuck, raising the risk of crashes, a federal safety agency said.

SpaceX: President Biden wants companies that use American airspace for rocket launches to start paying taxes into a federal fund  that finances the work of air traffic controllers.

Business With China : Tesla and China built a symbiotic relationship that made Elon Musk ultrarich. Now, his reliance on the country may give Beijing leverage .  

The Musk Foundation: After making billions in tax-deductible donations to his charity, Musk has failed recently to donate the minimum required to justify a tax break  — and what he did give often supported his interests.

OpenAI: Musk, who helped found the A.I. start-up in 2015, has filed a lawsuit  accusing the company and its chief executive  of breaching a contract  by putting profits and commercial interests ahead of the public good.

2024 federal budget's key takeaways: Housing and carbon rebates, students and sin taxes

Budget sees nearly $53b in new spending over the next 5 years.

What's in the new federal budget?

Social sharing.

Finance Minister Chrystia Freeland today tabled a 400-page-plus budget her government is pitching as a balm for anxious millennials and Generation Z.

The budget proposes $52.9 billion in new spending over five years, including $8.5 billion in new spending for housing. To offset some of that new spending, Ottawa is pitching policy changes to bring in new revenue.

Here are some of the notable funding initiatives and legislative commitments in budget 2024.

Ottawa unloading unused offices to meet housing targets

One of the biggest pillars of the budget is its housing commitments. Before releasing the budget, the government laid out what it's calling Canada's Housing Plan — a pledge to "unlock" nearly 3.9 million homes by 2031.

The government says two million of those would be net new homes and it believes it can contribute to more than half of them. 

It plans to do that by:

• Converting underused federal offices into homes. The budget promises $1.1 billion over ten years to transform 50 per cent of the federal office portfolio into housing.
• Building homes on Canada Post properties. The government says the 1,700-plus Canada Post offices across the country can be used to build new homes while maintaining postal services. The federal government says it's assessing six Canada Post properties in Quebec, Alberta and British Columbia for development potential "as a start."
• Rethinking National Defence properties. The government is promising to look at redeveloping properties and buildings on National Defence lands for military and civilian use.
• Building apartments. Ottawa is pledging a $15 billion top-up to the Apartment Construction Loan Program, which says it will build 30,000 new homes across Canada.

Taxing vacant land?

As part of its push on housing, the federal government also says it's looking at vacant land that could be used to build homes.

It's not yet committing to new measures but the budget says the government will consider introducing a new tax on residentially zoned vacant land. 

• Freeland's new federal budget hikes taxes on the rich to cover billions in new spending
• Are you renting with no plans to buy? Here's what the federal budget has for you

The government said it plans to launch consultations on the measure later this year.

Help for students 

There's also something in the budget for students hunting for housing.

The government says it will update the formula used by the Canada Student Financial Assistance Program to calculate housing costs when determining financial need, to better reflect the cost of housing in the current climate.

The government estimates this could deliver more aid for rent to approximately 79,000 students each year, at an estimated cost of $154.6 million over five years.

• Updated Federal budget's funding boost for defence spread out over multiple years
• Liberals pledge $9B in new money for Indigenous communities in 2024 budget

The government is also promising to extend increased student grants and interest-free loans, at an estimated total cost of $1.1 billion this year.

Increase in taxes on capital gains

To help cover some of its multi-billion dollar commitments, the government is proposing a tax hike on capital gains — the profit individuals make when assets like stocks and second properties are sold.

The government is proposing an increase in the taxable portion of capital gains, up from the current 50 per cent to two thirds for annual capital gains over $250,000. 

New investment to lead 'housing revolution in Canada,' Freeland says

Freeland said the change would impact the wealthiest 0.1 per cent.

There's still some protection for small businesses. There's been a lifetime capital gains exemption which allows Canadians to exempt up to $1,016,836 in capital gains tax-free on the sale of small business shares and farming and fishing property. This June the tax-free limit will be increased to $1.25 million and will continue to be indexed to inflation thereafter, according to the budget.

The federal government estimates this could bring in more than $19 billion over five years, although some analysts are not convinced.

Disability benefit amounts to $200 per month 

Parliament last year passed the Canada Disability Benefit Act, which promised to send a direct benefit to low-income, working-age people with disabilities. 

Budget 2024 proposes funding of $6.1 billion over six years, beginning this fiscal year, and $1.4 billion per year ongoing, for a new Canada Disability Benefit.

Advocates had been hoping for something along the lines of $1,000 per month per person . They'll be disappointed.

According to the budget document, the maximum benefit will amount to $2,400 per year for low income individuals with disabilities between the ages of 18 and 64 — about $200 a month.

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The government said it plans for the Canada Disability Benefit Act to come into force in June 2024 and for payments to start in July 2025.

Carbon rebate for small businesses coming 

The federal government has heard an earful from small business advocates who accuse it of reneging on a promise to return a portion of carbon pricing revenues to small businesses to mitigate the tax's economic costs.

• What's behind the carbon tax, and does it work?
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The budget proposes to return fuel charge proceeds from 2019-20 through 2023-24 to an estimated 600,000 businesses with 499 or fewer employees through a new refundable tax credit.

The government said this would deliver $2.5 billion directly to Canada's small- and medium-sized businesses.

Darts and vape pods will cost more 

Pitching it as a measure to cut the number of people smoking and vaping, the Liberals are promising to raise revenues on tobacco and smoking products.

• Just Asking  wants to know:   What questions do you have about quitting smoking or vaping? Do you think sin taxes will encourage smoking cessation?  Fill out the details on  this form  and send us your questions ahead of our show on April 20.

Starting Wednesday, the total tobacco excise duty will be $5.49 per carton. The government estimates this could increase federal revenue by $1.36 billion over five years starting in 2024-25.

The budget also proposes to increase the vaping excise duty rates by 12 per cent effective July 1. That means an increase of 12 to 24 cents per pod, depending on where you live. 

• 'Stay the hell away from our kids': Health minister vows to restrict nicotine pouches — but how?

Ottawa hopes this increase in sin taxes will bring in $310 million over five years, starting in 2024-25.

More money for CBC 

Heritage Minister Pascale St-Onge has mused about redefining the role of the public broadcaster before the next federal election . But before that happens, CBC/Radio-Canada is getting a top-up this year. 

The budget promises $42 million more in 2024-25 for CBC/Radio-Canada for "news and entertainment programming." CBC/Radio-Canada received about $1.3 billion in total federal funding last year.

The government says it's doing this to ensure that Canadians across the country, including rural, remote, Indigenous and minority language communities, have access to independent journalism and entertainment.

Last year, the CBC announced a financial shortfall, cut 141 employees and eliminated 205 vacant positions. In a statement issued Tuesday, CBC spokesperson Leon Mar said the new funding means the corporation can balance its budget "without significant additional reductions this year."

Boost for Canada's spy agency 

As the government takes heat over how it has handled the threat of foreign election interference, it's promising more money to bolster its spy service.

The Canadian Security Intelligence Service is in line to receive $655.7 million over eight years, starting this fiscal year, to enhance its intelligence capabilities and its presence in Toronto.

• CSIS chief defends his spies' work after PM casts doubt on reliability of agency's reports
• Trudeau says it's his job to question CSIS intelligence, call out 'contradictions'

The budget also promises to guarantee up to $5 billion in loans for Indigenous communities to participate in natural resource development and energy projects in their territories.

These loans would be provided by financial institutions or other lenders and guaranteed by the federal government, meaning Indigenous borrowers who opt in could benefit from lower interest rates, the budget says. 

ABOUT THE AUTHOR

Catharine Tunney is a reporter with CBC's Parliament Hill bureau, where she covers national security and the RCMP. She worked previously for CBC in Nova Scotia. You can reach her at [email protected]

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