Running head: Cost Benefit Analysis 1

Cost Benefit Analysis

Natalie Klausman

8-15-2020

American University
Cost Benefit Analysis 2

Executive Summary

Galactic Liquidators is a small company that is struggling with increasing their profits

with the resources they currently have. Updating their inventory tracking system is one way to

potentially increase profits. In order to determine if investing in a new system is financially

feasible, the costs and potential benefits must be analyzed. Utilizing order of magnitude

estimates for some costs, data was put into the return on investment formula and calculated. As

long as the personal biases and Knightian uncertainty do not impact the analysis, the return on

investment was found to be 290%, with the inventory tracking device paying for itself in 93.5

days.

Introduction and Problem Statement

Galactic Liquidators is a four-year-old company that specializes in acquiring goods

through auction sites, demolition sites, and liquidating businesses. Depending on the type of

item, they refurbish it and relist it for sale on platforms such as eBay, Amazon, and social media

outlets such as Facebook Marketplace. The organization, that serves customers around the globe,

consists of three business partners and their seven employees. The main factor that is preventing

this small business from increasing their profits is their outdated inventory tracking system. This

outdated system is resulting in not just a loss of inventory, but valued customers as well. 

This loss affects numerous stakeholders. It affects the platforms that the items are being

sold on, and the business partners can potentially lose their "top seller" status. This status means

that the platforms will only take 10% commission from every sale. It also means that they are the

first displayed during item searches. The most influential stakeholder that is affected by this
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system is the property investor and land owner. Should any of his demolition items go missing,

he can force the business to pay for the full price of the item. 

This business should have a reliable tracking system that is computerized. Currently, this

system is made up of physical paper notes and SKU's that are further separated by item types and

rooms. The reason this situation has not been updated is twofold, which is man power and

money. With only seven employees besides the business partners, there is little time to delegate

new tasks outside the norm. The business also has limited funds to spend on extra equipment.

The proposed solution would involve in the investment of a new inventory tracking

system that would increase accuracy of tracking that would in turn increase profits. Since the

company has few employees, only one hand held device would be needed for the shipping

department which should reduce the cost of the initiative. Obtaining this device would not just

increase their profits, but ensure their ranking as a top seller on certain platforms, increase the

number of clients, and promote the longevity of the business name.

Methodology

Project Scope and Analysis Type

In order to create an outline for the CBA, the scope of the project must be clearly defined.

This encompasses all of the activities needed to be done to achieve the project outcome

(McGannon, 2018). Defining the scope will also aid in determining the budget and schedule of

the project (McGannon, 2018). A rough list of the scope of the project is:

 Acquire relevant budget information from the past year.

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 Review current inventory system pitfalls.

 Research applicable inventory systems and vendors.

 Labor distribution and warehouse re-inventory.

 New system training.

with the rough scope defined, a work breakdown structure, or outline can be further defined

through high-level deliverables, low-level deliverables and work packages. There are two high-

level deliverables for this project, which is the distribution of labor and the acquisition of

technology. The low-level deliverables for the acquisition of technology are:

 Gather all budget information from the last year.

 Determine key issues with current inventory system.

 Research inventory systems for the correct fit.

 Determine the most cost-effective vendor.

 Purchase of new technology.

The work packages for each low-level deliverable for the acquisition of technology involve clear

communication between all owners. They must all agree on the preferred vendor and the system,

if they disagree on anything, it will be put to a vote. The low-level deliverables for the

distribution of labor are:

 Determine the most cost-effective way to distribute labor without interrupting current

business processes.

 Determine who will facilitate new system training efforts.

 Re-inventory the warehouse with the new inventory tracking system.

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The work packages for each low-level deliverable are as follows:

 Begin necessary project budget calculations.

 review employee and business partner schedules, and if needed, provide incentives to

come in on days off.

 Determine possible risks to project schedule such as current and future contract

interference.

 Either have the vendor facilitate training or have owners spearhead all training efforts.

Data Sources

As detailed in the work breakdown structure, budgetary data must be collected before

moving forward. This data was gathered from multiple sources which include the business

partners Excel spreadsheets, selling platform account information, and their business accountant.

The information gathered encompasses the estimated amount of money lost due to lost sales, and

project budget costs.

Analysis

Pros and Cons of Project

It is important to be cognizant of not just the benefits of this investment project, but also the

negative aspects as well. The benefits of this project are:

 Increase in profits.

 Increase in productivity across all departments.

 increase in contracts and in customer satisfaction.

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 Business partners have more time to focus on achieving business goals.

The negative points of this project are:

 Cannot invest in multiple handheld inventory scanning devices.

 The re-inventory process is labor intensive.

 The entire implementation is time consuming.

 Limited budget.

Stakeholder MindMap

The group with the biggest impact on the situation’s outcome comes from the employees and

the business partners. The impact the employees have, specifically the shipping department,

revolves around the proper care of the inventory equipment. The project budget only allows one

inventory scanning device. Should this device be damaged, stolen, or lost, it would render the

entire project a failure. The business partners impact on the project comes from their ability to

properly train the shipping department in the utilization of the new inventory equipment and their

ability to motivate their workforce to embrace the new system.

The stakeholder with the highest level of importance belongs to the property investor/owner.

The verbal agreement between the business owners and the property owner is that the business

can operate rent free, but they must list and sell demolition equipment for the property owner at a

much lower rate that is not fixed. This makes the property owner not just an internal stakeholder,

but an external one as well. The least important stakeholder are the customers who purchase

items off of social media sites and Craigslist. Due to frequent issues with scammers, the business

has limited items listed on these sites.

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The biggest influence on the inventory tracking system project comes from the business

owners and the property owner. The business owners will be undertaking the bulk of the work of

the project. In this project, time equals money, and if the partners are not fully invested in the

project, then the project may never finish. The property owner, while not directly invested in this

project, casts an all-encompassing shadow over the entire business. Should the business not be to

his standards, or if he begins to encounter financial hardship in his own business, he could begin

to demand rent. This would cancel the entire project

Assessment of Bias
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Bias and perspective must be addressed when doing any kind of analysis. Three biases

were identified that could potentially harm the validity of the analysis. The first bias is that one

of the business partners is a personal friend. The desire to see this initiative succeed may result in

the unconscious manipulation of data to favor the business. The second bias deals with on of the

other business partners. His poor communication skills previously caused havoc within their

company. Change management and communication must by synonymous with each other. Not

participating in constant communication with all stakeholders could prevent the business partners

from making a properly informed decision.

The final bias stems from the mathematical skill, and lack thereof, that is required by this

analysis. Being uncomfortable with the level of math needed for this analysis may manifest in

the form of the wrong formula being used. Choosing a formula simply because it is easy to use

does not make it the right one for the analysis, and may give incorrect results and harm the

organization. Perspective must also be considered in this analysis. The differences between a

large corporation and a small business are numerous. This includes what financial numbers are

considered favorable. A large corporation might be able to achieve a 10% return on investment,

but because small businesses take greater risks, a return on investment between 15%-30% is

desirable (Neat.com, 2020).

Risk Assessment

Several risks were identified in this project. The types of risk are organizational,

contractual, and statutory/political in nature. Organizational risks include issues with

communication and staff turnover. Communication with all stakeholders is essential in any

project, however, communication between business partners has been an issue in the past. Poor
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communication could mean issues with project milestones not being met and poor change

management. Staff turnover may also prove to be problematic for the project. They recently lost

two employees and a current employee is covering only half their shifts. Should this turnover

continue during the project, then the work breakdown structure may need to be redone. 

     Contractual issues include defects in the handheld scanning device itself. While the business

partners are highly skilled with all forms of technology, should an issue arise with the device

itself, they may need to send it back which would set the entire project behind schedule.

Statutory/political risks come from an external stakeholder, who is also their landlord. At any

time, this landlord can demand rent, or sell the building. This would stop the project

entirely. Many of these risks are Knightian in nature. This means that they are an uncertainty, not

so much a risk, since risks can be quantified (Kongevej, 2006). This has created a fragile

foundation for the analysis. Due to the inability to quantify these uncertainties, it may be wise to

not go through with the analysis.

Data

The total budget for this project is $2,500 and comes from their personal accounts, therefore

no interest is attached to this number. The ideal inventory tracking system that fits the budget is

$1,353, without the insurance attached to it. Due to the fact that the project has a limited budget,

the three business partners decided that they would come in every weekend for a month to re-

inventory the warehouse. This reduces the labor costs to only $600, which will be used for food,

beverages, and any other items they may need during the process. The training costs is small, at

$250, since only the shipping department will be using the scanning device. This brings the total
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project costs to $2,203, leaving $297 left over for any emergency costs. The total sales lost in the

past year, $8,600 will be used for the analysis as well.

Analysis

The analysis will use the return on investment (ROI) formula which is:

Inputs-Outputs/Outputs*100

Since the project is being done to get rid of lost sales related to inventory issues, the sales lost

over a one-year period will be the order of magnitude estimate used for the inputs.

ROI= 8,600-2,203/2,203*100

ROI=6,397/2,203*100

Rmj OI= 2.9038*100

ROI= 290.38%

To determine how many days, it will take until the new inventory system pays for itself, the

yearly lost sales is divided by the number of days in a year. The total cost of the project is then

divided by the number of days, which comes to 93.5 days.

8600/365=23.65

2203/23.65=93.5 days

Conclusion
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The results of the cost benefit analysis of the new inventory tracking system found that it is a

financially feasible investment. The return on investment was found to be 290%, and the device

will have paid for itself in 93.5 days. By investing in this project, the business partners will have

a greater chance of thriving in the ecommerce industry. It is important to remember that the

Knightian uncertainty inherent in this project cannot be quantified or predicted, however, the

benefits of this initiative outweigh them drastically and could aid in their ability to properly

prepare for the possibility of the events happening.

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Bibliography

McGannon, B. (2018, May 1). Project Management Foundations: Budgets [Video File]

Retrieved from Lynda.com.

How to Calculate ROI Before Buying a Business (26th, June, 2020). Retrieved from: http://

www.neat.com/blog/how-to-calculate-roi-before-buying-a-business/#.~:text=large%

20corporations%20might%20enjoy,between%2015%20and%2030%20percent

Kongevej, G. (2006). Risk and Uncertainty in Cost Benefit Analysis. Environmental Assessment

Institute.