Today’s business leaders are facing unprecedented uncertainty. Between a volatile stock market, high interest rates, supply chain issues, inflation, and a possible recession, having a solid financial planning process in place is an important piece of sustaining your business through challenging times. As part of this process, the office of finance and department heads spend an immense amount of time creating, reviewing and approving the business’s budget for the fiscal year ahead – but it’s important that financial management doesn’t stop there. The subsequent financial statements provide the business a point in time reflection on how the business is doing in relation to its plan. And, one financial statement – your budget vs actual statement – shows where the reality of the business has deviated from the plan – and is a critical component to helping maintain business stability.
As all business and finance professionals know, there will always be differences in what you plan versus what happens throughout the year. But in analyzing those differences, the business can be better prepared and more informed for the future.
Budget vs Actual Statement – What It Is and What It Isn’t
Your budget vs actual statement is exactly that – an important part of a business’s financial reporting that shows, for a period of time, what your actual income and actual expenses look like compared to what you thought they would.
The budget portion of the statement obviously comes from your financial plan, while the actuals are derived from the details of the income statement and balance sheet. This creates the most important piece of this statement – the budget variance.
It’s often expected that there will be small variances from the budgeted amounts. Minor changes in pricing, sales and so forth result in a few differences between what was planned for and the actual results. However, in the current business climate, what were once small variances may be larger and have a greater impact on your cash flow and bottom line.
What’s important for the organization is the analysis of the variances, the budget variance explanations – why did they happen?
How to Use a Budget vs Actual Statement and Why It’s Important
Where the budget variance becomes important is in dealing with large differences. If sales have dropped dramatically, or costs have skyrocketed, it’s critical to the health of the business to understand why that happened.
Even when the reasons behind variances are outside the control of the company, having visibility and analyzing the differences will empower the organization to make adjustments to keep the business on track.
The first step to take in budget vs. actual variance analysis is to understand what business activities deviated significantly from what was expected. Did manufacturing costs increase? Did commission payouts plummet?
Once you’ve pinpointed the “who” and “where” of the variances, you can begin to dig into the “why”. For businesses operating off of spreadsheets for their budgets and financial statements, this might be a challenge. It may be easy to see where the differences come from, but “why” will be harder to find.
If, on the other hand, the office of finance has access to reporting and analytics tools with their accounting software that collates financial data from across the business, the financial analysis of the reasons for a positive or negative variance becomes clearer. Is the sales team struggling to hit their numbers or is it that a large sale that was expected early in Q1 actually coming in closer to H2?
More importantly, why did that sale not come in when expected? Was it a salesmanship issue? Or were the materials for manufacturing available later than expected? The answers to those questions will have a bigger, and more direct, impact on your plans for the rest of the budget period than just knowing sales were lower than expected.
The budget vs actual financial statement is an important piece of intelligence for the organization, but where the real power of this report comes from is in its analysis. With a full picture of not just what happened to create budget variances, but why they happened, the business can stay on track, and make more accurate plans for the future.
The Role of Budget vs Actual Analysis Software
Now that we’ve discussed what a budget vs actual statement is and why it’s critical for monitoring business performance, let’s discuss the right tools for the task.
Most businesses use several platforms to manage their budget, including spreadsheets and a GL or ERP solution. Unfortunately, when it comes to pulling together an accurate budget vs actual statement for analysis, having different platforms can create several challenges (and this is not an exhaustive list):
- Lack of collaboration: many basic budgeting tools like Excel are not collaborative and do not provide insight when needed.
- Misalignment between spreadsheets and daily operations: monitoring plan versus performance becomes nearly impossible when there is a disconnect between the organization’s day-to-day activities and the model
- Data integrity: because data is typically entered into these solutions manually, it’s prone to errors and broken formulas
- Scenario testing: with data in various systems and/or spreadsheets it’s nearly impossible to pull the necessary for budget vs actual data to test various scenarios
To mitigate these challenges, it’s critical to use the right solution for the task. Centage’s Planning Maestro removes planning waste and roadblocks and delivers a direct line-of-sight into the organization’s current and future financial health. Integrated cash flow, balance sheet, and P&L forecasting and reporting – connected to meaningful data contained in ERP and back-office systems – provides an ‘always on’ single source of truth that supports agile decision making. Intuitive scenario planning enables testing of multiple options, so companies focus on the right priorities, capitalize on new opportunities, and accelerate delivery of business value.
GL/ERP Integration Supports Budget vs. Actual Variance Reports
With Planning Maestro, your balance sheet, statement of cash flow, and the P&L are all connected to meaningful data contained in ERP and back-office systems — and always up-to-date and synchronized. This means generating a budget vs. actuals report and reforecasting to account for missed assumptions, market changes, and other business fluctuations is fast, easy and accurate.
Budget Variance Explanations All Year-Long
Finance leaders know that budgets are never set in stone. The dynamic nature of business means a budget that looked great in January can require a major overhaul in April. It can cause havoc in an organization that does not have an efficient process for adjusting budgets and plans accordingly. Planning Maestro streamlines budget to actual variance analysis and eliminates the time-consuming and error-prone manual work typically needed to reference and compare budgets and forecasts.
Scenario Planning at Your Fingertips
Scenario planning is more critical than ever, allowing organizations to explore the financial consequences of alternative business strategies. Planning Maestro makes it easy to run various budget scenarios and compare against actuals data to see their impact and make meaningful decisions.
A state-of-the-art budgeting, planning and forecasting software, Centage’s Planning Maestro is designed to help businesses stay agile in times of economic upheaval. Using the latest automation technology, companies can gather the practical, data-driven insights they need to make intelligent contributions. Along with helping businesses see how and why actuals differ from plans, Planning Maestro empowers them to generate an accurate P&L, balance sheet and subsequent budget vs actual statement to facilitate better collaboration company wide, and initiate changes quickly in response to predictions and results.
Centage provides modern FP&A software solutions that empower Finance teams to lead the way to a stronger, more agile business. Our cloud platform, Planning Maestro, makes sophisticated budgeting, planning, and forecasting easy and accessible. Intuitive automation accelerates workflows and improves accuracy, enabling Finance leaders to deliver reliable information and meaningful insights at the speed of today’s business. For more information on how to modernize your FP&A process, view our product demonstration video, or call 800-366-5111.