Safety Pays!
Constructing a Cost-Benefit Analysis
Employers may want to know what the financial benefits are if they approve a recommendation. They may require you to contrast the benefits if the recommendation is approved against the costs if it is not. To do that, let's construct a cost-benefit analysis using the scenario below.
Scenario
To convince the decision-maker to approve a $10,000 investment in fall protection training, we need to compare the financial impact of approving the investment versus not approving it. Based on OSHA Safety Pays Program Estimated Cost data, total accident costs for a serious injury can over $100,000. For this scenario, we'll use the following financial information.
- Investment: $10,000
- Estimated Total Accident Costs: $100,000
- Gross Annual Sales: $10,000,000
- Net Annual Profit: $600,000
- Percent Net Annual Profit Margin: ($600,000/$10,000,000) =.06 x 100 = 6%
What will be the impact of the investment on Net Profit Margin if it prevents an accident?
A $10,000 investment in training will reduce the company's net annual profit by about 1.7% to $590,000. The net profit margin will be reduced to 5.9%.
- \( \text{Net Profit Margin After Investment} = \left (\frac{\$590,000}{\$10,000,000} \right) \times 100 \approx \textbf{5.9%} \)
What will be the impact on net profit margin if the investment is not approved and an accident occurs?
The current net annual profit of $600,000 would be reduced by about 16.7% to $500,000. The net profit margin is reduced to 5%.
- \( \text{Net Profit Margin After Accident} = \left( \frac{\$500,000}{\$10,000,000} \right) \times 100 = \textbf{5%} \)
What is the Return on the Investment (ROI) when it prevents an accident?
If the $10,000 investment in this scenario prevents a $100,000 accident, the ROI will be 900%.
- \( \text{Return on Investment (ROI)} = \left( \frac{\$100,000-$10,000}{\$10,000}\right) \times 100 = \textbf{900%} \)
As you can see, the financial benefits of investing in accident prevention can be substantial compared to the potential costs of a serious accident.
Knowledge Check Choose the best answer for the question.
7-11. If the employer makes an investment of $1,000 to correct a hazard that is certain to cause an accident with a total cost estimated at $28,000, what is the return on the investment (ROI)?
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\( \text{Return on Investment (ROI)} = \left( \frac{\text{COST} - \text{INVESTMENT}}{\text{INVESTMENT}} \right) \times 100 \)
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