Cost versus revenue analysis is a powerful tool used by managers of businesses, government agencies and non-profits alike. If used properly, it can provide decision-makers with the information they need to assess the value of a project objectively. In some cases, cost revenue analysis is used to examine the social impacts of a particular program. Understanding the basics of this method is important for those interested in management, whether in the public or the private sector.

Basics

Cost versus revenue analysis is a method of examining a project concept that compares its costs -- either expected or actual -- with its revenues. It usually involves the use of forward-looking projections that are intended to predict future conditions, though it's also used to determine past performance and help evaluate a project's or program's success. As an incidental benefit, the practice can also shine light on areas for improvement and assess an organization's ability to forecast.

Benefits

Cost versus revenue analysis offers a number of key benefits for management. Perhaps the most important among them is that it offers objective information to help guide decisions that commit limited financial or social resources. According to the World Bank, "analyzing the costs involved in providing services and the sources and flow of revenues helps managers make decisions about the best use of resources and ways to recover costs." In some cases, a non-profit organization, government agency or business is required by law or grant requirements to conduct a cost revenue analysis. In these cases, it is important to conduct an analysis consistent with the expectations defined by the grant maker or the law.

Drawbacks

While cost versus revenue analysis can be useful in some decisions, it is not without drawbacks. The World Bank reminds non-profits that "it is important to keep in mind that the information provided by a cost and revenue analysis is only one aspect of strategic planning," and that other, less quantifiable factors such as client needs or social equity should be taken into account. There are organizations and project proposals where this particular method is not always appropriate or informative. For example, a funder of a non-profit may require a grantee to disburse a specified percentage of its grant award to certain low-income individuals, even if it costs the organization more to do so. A grant recipient organization should always adhere to its funder's instructions and requirements as closely as possible, even if a cost revenue analysis would advise otherwise.

Components

Cost versus revenue analysis consists of two key elements: cost analysis and revenue analysis. Cost analysis provides a detailed estimate of the costs of resources, such as personnel, supplies, and equipment, associated with implementing a project, program, service, or other activity, according to the World Bank. Revenue analysis, by contrast, examines the income realized from various sources. Revenues are sometimes considered in the scope of the project alone -- as in the case of business or fundraising activities. In other cases, the organization might find it more useful to consider all revenues it receives, whether directly associated with a particular project, or not.