3 Tips on Cost Effective Analysis and How it Works

moneyIt is said that perfect preparation prevents poor performance. It’s true as cost effective analysis and development plan that were thorough to the last detail lead to success of every company. The economic efficiency of every enterprise depends on different factors and financial sustainability and prosperity is not a stroke of good luck. This is a result of competent management plan and cost effective analysis and all other complex factors that determine the results of the economic activity of the enterprise.

The key to stability and competitiveness of every enterprise is the financial stability that guarantees its investment attractiveness. And it can be reached due to cost effective analysis. The main purpose of cost effective analysis as opposed to cost-benefit analysis of each business entity is to assess the effectiveness of its economic processes and financial condition. Below you may find different tips and guidelines on how to conduct cost effective analysis in the best way.

1. Choose Correct Analysis Type

There are different types of cost effective analysis, such as preliminary, operational, final and prospective. Preliminary analysis allows to assess the efficiency of a business plan, evaluation of manufacturing organization capacity, ability to provide the planned volume of needed production. Operative (current) analysis is conducted on a daily basis, in the normal course of business organization operation. Total (subsequent or retrospective) analysis examines the efficiency of economic activities of organizations for finished period. Prospective analysis is used to determine the expected results for the upcoming period. This type of analysis examines possible options for development of the organization and outlines ways to achieve optimal results.

2. Mind the Interests of Users

Cost effective analysis should take into account the interests of the users which can be divided into four groups. First group – investors and creditors, legal persons who lend money to the commercial organization and receive its share in the form of interest on loans and borrowings. Second group – public authorities who control and ensure the normal functioning of the enterprise. Third group – owners of the company who control the distribution of earnings. Fourth group includes employees and contractors (suppliers and creditors). Representatives of this group satisfy their interests in various ways, including obtaining of an appropriate share of the total revenue of the commercial organization (wages, interest on current loans, ability to market products of the organization).

3. Use Appropriate Principles of Analysis

  • The first principle is simulation of future cash flow. Estimation of future investment project flow of money lies in predicting the size of possible income, resulting from the implementation of the investment project.
  • Second principle is accountability of cash flow income from the project implementation. Third principle is elimination of the past (incurred) costs.

Every cost effective analysis is aimed at deep study of economic state and future prospects of the enterprise, that is, identifying the causes of deviations from the plan and the flaws in the working process that are to be combated. Of course, the successful result itself is very important, but it is equally important to know due to what costs this result can be reached.

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