Getting started with cost-benefit analysis

Cost-benefit analysis is not the boiled egg of impact measurement—Delia Smith would not include it in ‘How to measure impact, part 1’. It takes time and patience and a love of Excel spreadsheets—to continue the culinary analogy, it’s more like the soufflé. And yet because it results in a financial value being ascribed to your impact, in the current funding climate many charities are understandably intrigued.

We are excited that charities are thinking about their impact and think that cost-benefit analysis can be an excellent way to demonstrate what you achieve. However, you can rush into doing a cost-benefit analysis. In our experience, it is only compelling—for fundraising purposes or otherwise—if it is based on good outcomes data.

Here are our tips for what to do before you even crack open a spreadsheet:

1. Calculate your unit cost. Okay, so this may require a spreadsheet, but you will need a unit cost to do pretty much any type of a economic analysis, including cost-benefit analysis. A unit cost is the financial cost to the charity of working with one beneficiary. There is some guidance on calculating your unit cost in NPC’s Little blue book.
2. Clarify your theory of change. A theory of change shows how your activities lead to the outcomes that meet your aims. It is a useful way to establish what to measure, whatever measurement you decide to do. It is particularly useful if you then use the data you collect in an economic analysis because it gives you a framework to talk about which outcomes you are giving a financial value to and which you are not. Without a theory of change, it is tempting to latch onto those outcomes that you know deliver a financial punch rather those that are convincingly linked to your activities. It also should get you thinking about the ‘so what’ question—important for estimating the counterfactual of what would happen if you were not there.
3. Do a data audit. It is likely that you already collect some data. Do an audit of this data to see what could be used as evidence for your theory of change. For a cost-benefit analysis, you will need evidence of outcomes that is robust enough to be linked convincingly to financial proxies. A data audit will allow you to assess the quality of your data and, if appropriate, start collecting outcomes data that can be fed into a cost-benefit analysis without too many leaps of faith.

As we said in our SROI position paper last year (NPC sees SROI as a type of cost-benefit analysis distinguished by its emphasis stakeholder perspectives), charities need better outcomes data to make the most of more complicated approaches like cost-benefit analysis. Regardless of whether you then decide to do a cost-benefit analysis, these three things—calculating your unit cost, clarifying your theory of change and doing a data audit—are good practice anyways for developing the outcomes data you need to demonstrate your impact.