What is the difference between a Business Case Analysis, and a Cost Benefit Analysis? Is there a difference between the information that each provide, or are they interchangeable terms?
Generally speaking, a Cost Benefit Analysis (CBA) is an examination of all necessary costs related to the production and consumption of an output, independently of who bears the costs. These costs are then weighted against the expected benefits resulting from the materialization of the output.
A key aspect of CBAs is the consideration of the times at which costs are paid and at which benefits are accrued. All the necessary investments and the expected benefits are transformed into a monetary value in the form of an expected Net Present Value (NPV). Money does not have the same economic value at different points in time. To make comparisons between different cash flows in different points in the future, we discount the value of all those expected inflows and outflows to the present moment in time.
A CBA is a neutral assessment within a few viable options. It is “neutral” in the sense that the criteria used to decide are objective and there is no or limited space for subjectivity. A Cost Benefit Analysis will help to:
Identify all costs and benefits.
Calculate the economic value of the project.
Make a cash flow projection.
Select the best option.
Classify costs and benefits by order of importance.
Determine the critical factor(s) of success.
What is a Business Case Analysis (BCA)?
A BCA describes the business rationale for undertaking a program (or group of projects) and serves as a basis for decision makers to decide whether funding should be provided and/or whether an investment should proceed.
The reality is that sometimes economic cost considerations top the list of decision factors, e.g. when a stakeholder is focusing on a critical cost-reduction. However, many decision makers consider more than just economic factors when evaluating their options. Decision makers also think about better performance, improvements in service, cost efficiency, reductions in delays, human workload and better safety and security as well as compliance with standards and regulations. All these areas need to be assessed to understand the impacts of the changes as not all benefits are financial. Assessments can range from qualitative expert judgments to, whenever possible, quantitative and monetary impacts.
A BCA shows the benefits and positive impacts of an investment but also the negative impacts for stakeholder groups, identifying as early as possible the potential divergence of interests between stakeholders in order to anticipate early mitigation measures if possible.
Business cases facilitate better informed decisions by:
Ensuring stakeholder involvement and buy-in.
Ensuring that different options are identified and properly assessed.
Fostering consistency between Business Cases and other assessments.
Enabling R&D to be focused on significant issues.
Bottom Line: A BCA goes beyond a financial analysis. It takes the CBA as an input but also includes a wider set of quantitative and qualitative arguments from performance and transversal activities (safety, security, environment, human performance, strategic fit, etc.), as well as aspects such as financing arrangements, scenarios for deployment, etc. that are key to determine the value of the project.