Staying on top of your financial performance is vital for running your business. Unfortunately, creating a perfect budget doesn’t mean that you’ll follow it. Budget vs actuals analysis is one of the most effective ways to maintain a clear picture of your company’s performance.
Budget vs actuals analysis allows you to assess how well your organization is following its financial plans. It allows you to calculate variances, understand which variances are important, and improve your company’s financial performance.
Defining budget vs actuals analysis
Budget vs actuals analysis compares your company's actual financial performance to your budget. It sheds light on whether you’re on track, underperforming, or exceeding your company’s financial goals.
This analysis covers numerous aspects of a company's financial statements, including:
- Income statements
- Balance sheets
- Cash flow statements
By comparing the actual financial results with the budget, you can accurately assess the financial health of your business.
6 steps to calculate budget vs actuals variances
Understanding how to calculate budget vs actuals variances is simple. Here's the step-by-step process:
1. Gather the data
Collect your company’s financial data, including the budgeted and the actual figures for the same timeframe. Organize these figures in a clear and structured way, because disorganized datasets can slow down your progress and cause errors.
2. Subtract actuals from budgets
Once you have your data in hand, subtract the actual figures from the budgeted figures for each line item or category. The result is the variance between what you expected to happen and what actually happened.
3. Interpret the variances
This step is where your efforts start telling a story. Assess each variance to determine how important it is. Are the differences unimportant, or a big deal? Are they positive or negative? This step is crucial for identifying areas that need improvement and those that are working well as is.
4. Investigate the causes
Dig into each significant variance to get to the root cause. Did changes in market conditions cause it? Are internal processes the reason? Or did it develop from unforeseen events? Answering these questions will help determine the actions you need to take.
5. Take action
Develop a plan to address the variances in your financial forecasting. This might involve adjusting future budgets, revising your strategies, or improving elements of your internal processes.
6. Monitor and repeat
It’s not enough to only use a budget vs actuals analysis only once or twice throughout the year. Monitor your budget vs actuals report and repeat this variance reporting to make sure you can address issues quickly before they negatively impact your company.
Which types of variances are important to analyze?
All variances aren’t equally important. You must prioritize the ones that have the most significant impact on your business. As you’re looking at your budget variance analysis, focus on the following types of budget vs actuals variance:
You always want to analyze the differences between your sales forecasting and what the revenue ended up being. Favorable variances may indicate your company had more sales than you expected, or you sold your products or services at higher prices. Negative variances may signal that there isn’t as much demand for your product or service, more competitors have entered your market, or your pricing was too high for the market.
Operating expense variances can tell you important things about how your company manages its costs. Positive variances suggest that you’re taking advantage of cost-saving opportunities, while negative variances may show you’re not controlling spending. It may also signal that there are inefficient processes draining money off your bottom line.
Profit margin variations can help you understand your company’s profitability. Higher than expected profit margins indicate that the company is on solid ground and performing well. However, negative variances may indicate margin erosion, which could be detrimental to company growth if left unaddressed.
Cash flow variances
Cash is king, and putting a priority on it is smart. You can monitor differences between your projected and actual cash flows to ensure you have the necessary liquidity to meet your financial obligations.
Production output, employee productivity, and inventory turnover are some influential performance indicators. Operational variances can reveal how efficient and effective your business operations are.
Benefits of using budget vs actuals analysis
Executing the budget vs actuals analysis process provides you with several distinct advantages that can improve the health of your business.
Budget vs actuals analysis provides a starting point from which you can measure the financial performance of your business. Without a budget as a reference point, it's almost impossible to gauge how well the company is doing.
Detecting issues early
Regularly comparing actual results to your budget makes problems glaringly obvious. Early detection allows you to take corrective action before these issues escalate and impact the company’s revenue and growth.
Comparing the actual results to your budget helps ensure that your company's financial goals align with its strategic objectives. It's not just about making money. It's about making money in a way that advances your overall business strategy.
Making informed financial decisions
Resource allocation, investment opportunities, and strategic shifts are all made easier using the insights gleaned from budget vs actuals analysis.
Fostering accountability within your organization is another big advantage budget vs actuals analysis gives you. When departments or teams are responsible for budget adherence, it encourages them to manage finances responsibly.
5 ways budget vs actuals analysis improves strategic decision-making
Budget vs actual analysis provides a snapshot of your financial performance, and plays a pivotal role in shaping your strategic decisions.
1. Resource allocation
Identifying areas where your actual performance doesn’t measure up to your budget gives you a roadmap to allocate resources more strategically. Shift funds to areas that need improvement, or invest in initiatives that directly drive growth.
2. Scenario planning
Proactively prepare for different future scenarios by using your financial variances to conduct scenario planning. This process involves financial modeling of different outcomes based on various assumptions.
3. Risk mitigation
Budget vs actuals analysis aids in risk assessment by helping you detect significant negative variances early. Mitigating potential risks and uncertainties with enough lead time to change course protects your company and keeps you on track to hit your goals.
4. Strategic alignment
Variance analysis — and every other step of your FP&A process — must align with the strategic aims of the organization. For example, if your budget highlights the importance of cost control, your strategic decisions should reflect efforts to achieve cost savings.
5. Continuous improvement
Budget vs actuals analysis is a continuous process. Learning from past variances and adjusting your budgets and strategies accordingly gives you the insight to consistently improve your company’s financial performance.
Measure business performance with budget vs actuals analysis
Get the data-driven information you need to create a clear roadmap to assess your company’s financial health, detect discrepancies, and make informed decisions. Leveraging this budget vs actuals analysis allows you to optimize your company’s financial performance, agilely make adjustments, and drive strategic success.
Book a demo to see how Centage's formula-free, drag & drop FP&A software streamlines budget vs actuals variance analysis, scenario planning, and other key functions of the finance team.