What does "cost-benefit analysis" evaluate?

Cost-benefit analysis serves as a systematic process used to evaluate the financial implications of a project or decision by comparing the expected benefits to the associated costs. The purpose of this analysis is to determine whether the benefits outweigh the costs, thereby providing a framework for making informed financial decisions.

In practical terms, this means quantifying the benefits (such as increased revenue, improved efficiency, or enhanced service delivery) and comparing them with the costs (including initial investment, operational expenses, and potential risks). A positive cost-benefit ratio indicates a favorable outcome justifying the investment, while a negative ratio suggests that the costs may exceed the anticipated benefits.

This method is particularly valuable in budgeting and financial planning as it helps decision-makers allocate resources effectively, prioritize projects, and assess the potential return on investment. The process focuses specifically on the economic costs and benefits, making it a critical tool for ensuring that public funds are spent wisely.

In contrast, analyzing the overall budget for future projects, assessing the effectiveness of ongoing expenditures, or evaluating the historical performance of past budgets may include elements of cost-benefit analysis, but they aren't focused solely on the direct comparison of expected benefits and costs that characterizes a true cost-benefit evaluation.