the Business Benefit?
The first step in deciding whether to make a major purchase
or take on a major project is to really sit down and think about
what you're trying to accomplish. What are the benefits that
will flow from your project? At this point, just focus on the
benefits. Once you get a handle on those, you can look at the
costs, and decide whether (or how) you can afford to carry out
Revenues and costs. In most cases, the types of
benefits you'll be looking for are things that increase your
revenues, or decrease your costs.
For example, let's say you're thinking of buying a truck, so
your retail store can make deliveries. Will this pull in
customers that don't already buy from you, or increase the level
of purchases of your existing customers? If so, the purchase
might be a good idea. However, it can also be a good idea if
you've been offering deliveries for some time, but the truck you
have has been costing you a fortune in repairs and maintenance
and you think you can find a more reliable vehicle with better
fuel mileage. In this case, you're not looking for a revenue
increase — your goal is to lower your vehicle expenses.
Most business owners (and their financial advisors) are
happiest when the benefit of a project is a revenue increase or
an expense decrease, because these kind of gains can be
quantified — the changes can be estimated in terms of dollars
brought in or saved. Thus, you can do a formal financial
analysis of the project that measures costs against benefits.
Moreover, after the project is completed, you'll be able to
measure the results in terms of dollars.
Less-tangible benefits. However, there are other kinds
of benefits that can flow from your project, and that can also
help your business, perhaps indirectly. For example, redesigning
your logo or purchasing new signage can give you a more
professional image, which may, in time, lead to better-heeled
customers and more revenue. Carrying certain lines of products
can strengthen your image with particular ethnic or religious
groups, even if the products themselves are not big moneymakers.
Depending on your business, these unquantifiable gains may be
quite important to you, even if the net benefit is hard to
measure or predict. Nevertheless, when you're faced with a
choice between two competing projects, it's usually best to
choose the one that has the greatest quantifiable
Sometimes a project will be needed to enable you to keep the
level of business you already have. For example, a hair salon
may need to replace furniture and redecorate, periodically, if
it wants to keep up a fashionable image. Repairs and
replacements of all types fall into this category. Benefits of
these kinds of projects can sometimes be quantified by
estimating the way your revenues would drop off over time if you
did not make the change.
And finally, some projects are simply mandated by law (such
as cleanup of certain environmental hazards, or upgrades to
comply with building codes). Although there may be no
incremental financial payoff, the project is needed to keep you
in business, period. In such cases, there may be various ways of
complying with the law (for example, several different ways of
treating hazardous wastes) and your analysis of the benefits
would focus on the pros and cons of several alternatives.
Tax incentives. Uncle Sam wants to encourage you to
invest in your business, and offers a number of tax
benefits for doing so. However, tax considerations should
always take a back seat to the operational needs of your
Decide on the project's details. As you concentrate on
the goals that you want the project to achieve, you'll begin to
focus on the specifics of what you need — for example, the
specific type, size, capacity, capabilities, etc. of a new
business machine, or the square footage, construction, and
location of a new
facility. If the asset is something that must be customized
or constructed for you, you'll have even more choices to make,
including who should perform the work. At some point, you'll
have fleshed out your requirements enough to take a look at
what's on the market. You'll start talking to salespeople or
even begin taking bids.
Concentrating on the benefits you wish to achieve helps you
in another way: if it turns out the particular project is not
financially feasible, you may be able to think of alternative
ways of achieving the same results. For example, instead of
buying a delivery truck, you might be able to hook up with an
independent package delivery service that will deliver to your
customers at a reduced rate. Paying the delivery service may be
a cheaper way of accomplishing the goal you've set for yourself:
increasing your sales to customers who need or want deliveries.
Keep in mind that the question of the business benefits you
can achieve and the detailed requirements of your intended
purchase or project can change, as you move on to evaluate
the costs. If the features you want are too expensive, you
may have to settle for less.