Financial planning in 2024: The importance of the budget vs. actual statement during times of change

Uncertainty and unpredictable change are constant factors in the business landscape today. Over the last few years business leaders have weathered and navigated through a volatile stock market, high interest rates, supply chain issues, and inflation, and those with solid financial planning process in place have been able to sustain themselves through challenging times.

As part of this process, the finance team and department heads spend an immense amount of time creating, reviewing, and approving the budget for the fiscal year ahead — but it’s important that financial management doesn’t stop after your annual budget is locked.

Regular financial reporting throughout the fiscal year provides a company with a point in time reflection of how the business is doing in relation to its plan. One financial statement in particular — the budget vs actual statement — shows where the reality of the business has deviated from the plan. The budget vs actual statement is a critical to helping maintain business stability.

As all business and finance professionals know, there will always be differences between what you plan and what actually happens throughout the year. By analyzing those differences, your business can be better prepared and more informed for the future, whatever deviations from the plan may occur.

What is a budget vs actual statement?

Your budget vs actual statement shows, for a period of time, what your actual income and actual expenses look like compared to what you thought they would. It's an essential part of any company's financial reporting.

The budget portion of the statement comes from your financial plan, while the actuals are derived from the details of the income statement and balance sheet. This differential is the most important piece of this statement, also known as the budget variance.

There will almost always be small variances from the budgeted amounts. Minor changes in pricing or sales result in a few differences between what was planned for and the actual results. However, in a rapidly changing business climate, what were once small variances may grow larger and have a greater impact on your cash flow and bottom line.

What’s important for the organization is the analysis of these 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 the “why” will be harder to find.

If, on the other hand, the finance team has access to reporting and analytics tools with their accounting software that collates financial data from across the business, the financial analysis of 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, as opposed to knowing only that sales were lower than expected.

The budget vs actual financial statement is an important piece of intelligence for the organization, but this report's real power is in the kind of analysis it enables. With a full picture of not just what happened to create budget variances, but why they occurred, the business can stay on track and make more accurate plans for the future.

Budget vs actual analysis software

With Centage, generating a budget vs. actuals report and reforecasting to account for missed assumptions, market changes, and other business fluctuations is fast, easy, and accurate

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, using multiple platforms can create several challenges:

• 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 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, when 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 Centage, 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. Centage 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 in minutes

Scenario planning is more critical than ever, allowing organizations to explore the financial consequences of alternative business strategies. Centage makes it easy to run various budget scenarios and compare against actuals data to see their impact and make meaningful decisions.

Centage is designed to help businesses stay agile in times of economic upheaval. Along with helping businesses see how and why actuals differ from plans, Centage enables them to generate accurate P&Ls, balance sheet and subsequent budget vs actual statements to facilitate better collaboration company wide, and initiate changes quickly in response to predictions and results. Book a demo to see how Centage can improve your budget vs actual comparisons.