An avoided cost is basically the capital and expense that would have been spent after a project’s hypothetical failure. It is a basic concept in the field of business. Contrary to, for example, cost savings, the idea behind this cost is not that easy to understand and it is quite difficult for most people to actually use it in business analysis and decision support.
Before thinking of taking up a business project, it is important to have everything planned out, which is something that every serious businessman knows. However, the actual possibility of success is often omitted, which leads to useless effort and investment in a prematurely failed project. The bottom line is the following question “Are my actions going to prevent future financial loses or ensure them?”
Ultimately, an avoided cost is exactly that — avoiding the certainty of loss by taking certain preventive moves. The best way to explain this tendency is by giving a car’s brakes as an example. If the driver takes the action of hitting the brakes before crashing the vehicle, it will most definitely avoid the costs for repair of the car. On the other hand, if the driver does not take any action they are doomed to suffer bad consequences. Another example – changing the car’s oil regularly will save the expenses of having the engine rebuilt later in time, and so on.
In general, an avoided cost is mathematically the same as cost savings. The main difference would be that cost savings regard events that are already happening, while an avoided cost prevents something damaging to the business that was to happen in the future. The avoided cost method, without any doubt, proves to be efficient for any small and large business. If the avoided cost rate is high, then that is one step closer to the flourishing business every person pursues. However, that method must not be confused with not taking any risks at all — they only have to be thought through and carefully planned as to reach optimal results after taking them.
To sum it all up, those were the overall characteristics of an avoided cost. The avoided cost method should definitely be a big part of any aspiring businessman’s plans as it not only helps develop and enjoy the best results of the work put into the business, it also ensures that failure is not a part of the process. When building a new business, or expanding on an already established one, avoided cost should be implemented as one of the tools used to ensure success in the future.
