Last week I sat down to complete an application form for a rebate on solar bores. The application was pretty straight forward, who/what is the entity applying, what are you applying for and a few other questions to make sure you meet the criteria for the funding.
One key condition of the grant is that the amount awarded will be based on the payback period of the project and the payback period must be between 2 and 6 years.
Two easy, I thought, simply work out what it costs to run the bores with diesel motors, estimate the new running costs once the solar has been installed and compare the savings to the cost of installing the solar system.
But then I wondered how many people can and, importantly how many actually do this sort of analysis when making decisions which affect their business?
I took a whole subject at university on cost-benefit analysis and the principles and practices from that course are probably some of the ones I use most in my own business, when conducting research and providing advice to clients.
One of the key principles that often people overlook is that the two scenarios are not ‘current situation’ and ‘new situation’ but rather the situation ‘without the change’ and the situation ‘with’ the change.
Looking at the solar bore example the scenarios are:
Without - Run diesel bores for the next 10 years – including the cost of any repairs or replacements that might be needed, considering a realistic increase in the cost of diesel
With - Cost of installing and maintaining the solar system.
I always write out a list of dot points under each scenario of the assumptions to check that I haven’t missed or double counted anything.
The next step is to understand the time value of money and discounting which is particularly important for large projects which are going to have costs and benefits over a long period of time.
My question to you is, do you understand these principles and how and when to apply them? If so, where did you learn about them?
If not, would you like to know more?
Cost-benefit analysis may not seem like the most riveting subject but I can guarantee that it will help you make better decisions and better decisions equal better businesses!