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Cost analysis and its importance in making a financial decision: Five reasons you must do one

by , 13 April 2015
Whenever you need to make a financial decision for your business, there are some factors you have to take into consideration. And although some of them might not have such a great impact, there are some procedures you'll have to put into practice in order to ensure the financial health of your business.

A cost analysis is one element that will help you make the right financial choice! This refers to the process of looking at the risks and benefits of your business decisions for it to grow. Making the most cost effective decision for your business will result in a much higher profit.

Read on to discover why this is so crucial to make the right decision.

Five reasons you must do a cost analysis:

1. You can use a cost analysis to help you make healthy business decisions, which leads to healthy finances

A cost analysis will help you evaluate the advantages and disadvantages to make the best decision to benefit your business. It will also help you understand all your risks and benefits. If not, it could cost you thousands in faulty decision-making.

2. This will help you look at all your costs so you can determine the correct selling price for your product or service

You already know that running a business costs money. Inflation goes up every year, increasing the price of certain products. Suppose your business uses a lot of water and electricity. You must factor these costs into your business' production costs on your cost analysis.

And this is when, after looking at all costs, you can correctly determine the selling price of your product. This will make sure your business still generates a profit and keeps on growing.

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3. It will help you determine if you need more labour to produce your goods and services

No need to explain that the more labour your business has, the higher your production. However, the labour does cost money and this is an important aspect of your business. By setting up a cost analysis you can see the financial state of your business and your product/service sales versus labour costs. Now, look at the pros and cons and see if you can hire additional labourers or carry on with what you have.

4. A fourth reason is the fact that you'll be able to show a bank how healthy your business in case you need to get a bank loan.

Pay attention to the fact that for any business that wanst to borrow money from the bank, security is essential.  The bank will want to see if your business is financially strong enough to take out a loan so that it won't take the risk of not having someone pay it back. To sum it up, a cost analysis will help you look at the financial health of your business. You'll also see if it's worth taking a loan to expand production. For example, purchasing machinery.

5. The final step states that a cost analysis will help you see if you're in a good financial position to expand your business

As your business grows, you may look at expanding to other areas. Let's assume you have a business in Pretoria North and you'd like to start another branch in Pretoria South. In this case, a cost analysis will help you see what it initially costs to start up your business.

This will provide an indication of what it will cost to start another branch so you'll know whether you should make this decision or not. Moreover, you'll also see if demand for the product is high enough to support the expansion.

Making a financial decision is never easy, but knowing some useful tips can make the choice easier!

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Cost analysis and its importance in making a financial decision: Five reasons you must do one
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