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Budget vs. actual variance reporting: What you're looking for

November 1, 2023
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Financial planning is a crucial part of sustaining and growing your business. The office of finance, department heads, and C-suite executives spend much of their time making, checking, and approving the yearly budget.And financial management doesn’t stop once the annual budget is approved. Financial statements allow the business to periodically reflect on how the business is doing in relation to its plan. There's one financial statement that stands out as the most important, because it shows where the reality of the business has deviated from the plan. This is the budget vs actual statement.There will always be differences in what you plan versus what happens throughout the year. By systematically analyzing those differences, a business can better prepare for the future.

What is a budget vs actual statement?

Your budget vs actual statement is a crucial part of a business' financial reporting. It shows how your actual income and expenses compare to what you expected for a specific period.The budget portion of the statement comes from a financial plan. Actuals are derived from the line items on the income statement and balance sheet. This difference between these two numbers is the most important part of a budget vs actual statement: the budget variance.Small variances from the budgeted amounts are inevitable and to be expected. Minor adjustments in pricing or sales volume will result in a differences between what was planned for and the actual results. While these budget variances can impact your cash flow, small alterations to your plan won’t massively affect your financial position.The important point with a budget vs actual statement is budget variance analysis: why did these discrepancies between budget and actuals occur? Is it favorable variance (for example, when the actual labor costs for a service are less than the budgeted costs) or unfavorable variance (when income is less than budget, or an expenditure is more than was budgeted)?

What do you do with a budget vs actuals report?

The most important thing to look out for in a budget vs actuals report (or variance report) are large differences between budgeted amounts and actual numbers. If sales have dropped dramatically, or costs have skyrocketed, it’s critical to the health of the business to understand why these changes happened and what can be done about them.Even when the causes of budget to actual variance are outside the control of the company, identifying and analyzing the differences empower the organization to make adjustments and keep the business on track.

How do you get started with a budget v actuals report?

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 plummet? Did commission payouts suddenly increase? Look for the biggest variances first.Once you’ve pinpointed the major variances, you can analyze the reasons behind them. If your finance office relies exclusively on spreadsheets for their budgets and financial statements, this will be a challenge. It might be easy to see where the differences come from, but why will be harder identify.If, on the other hand, the office of finance has access to reporting and analytics tools from FP&A software that collates financial data from across the business, the reasons for a positive or negative variance become clearer.Let's illustrate with a hypothetical example. Let's say you're looking at your Q2 income, and it's much higher than you anticipated when you set the budget. Is the sales team hitting it out of the park, or is it because a large sale that was expected late in the year actually came through during Q2? Why did that sale come in early? Was it great salesmanship? Or were the materials for manufacturing available sooner than expected?Budget vs. actual analysis helps answer these questions and affects your plans for the rest of the fiscal year. It goes beyond just knowing sales were higher than expected in a budget period and drills down into actionable insights.

Why is budget vs actual analysis important?

The budget vs actual financial statement is an important piece of intelligence for the organization. The real power of this report comes from the type of analysis it enables. With a full picture of not just what happened to create budget variances, but why these variances happened, the business can stay on track and make more accurate plans for the future.Centage cuts through the noise to simplify financial forecasting and variance reporting. Our formula-free FP&A software lets you quickly generate variance reports or budget actuals, drill down to understand why variances occurred, and facilitate collaboration among budget owners. Book a demo today.

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