An Overview of the Budget vs. Actual Report Analysis Process

Budget vs. Actual Variance

Budget to actual variance analysis or budget variance analysis is a comparison of your company’s planned financial transactions for a given time period (budget) and the final financial results of that period of time (actual). Budget variance can be expressed as a percentage or as the total cash difference between budget and actual numbers.

Comparing the total difference between budget and actual gives a quick look at your business’s performance, but the real value of a budget vs. actuals report is in the details. Budget vs. actuals reports should be itemized down to a useful granularity, allowing your company to gain insights into the specifics of each facet of your company’s financial situation. A solid budget variance report gives you information regarding not just variations but also the reasons behind them.

Static Budget vs. Actual Figures

Your budget vs. actuals report measures two types of data: the static budget and actual figures. Together, they represent the difference between beginning-of-the-year planning and end-of-year reality.

Your static budget never changes. It’s a figure that’s determined before the start of the fiscal year and is based on projected income and expenses. 

By contrast, actual figures reflect your actual budget—income and expenses throughout the year that contribute to revenue and cash flow. 

The difference between static and actual figures represents your budget variance. It’s important to review both static budget and actual figures so your business knows where and when to pivot. These numbers can help you:

• Adjust the budget for next year. 
• Find ways to cut expenses or increase income.
• Determine if you need additional financing.
  
  

Types of Budget Variances

Budget variances can be either positive or negative, depending on whether the numbers are higher or lower than your financial projections. They reflect contributions to your company’s KPIs. 

A favorable variance indicates positive KPI results, meaning your company performed better than anticipated. Maybe your sales team exceeded its goals, or your operational expenses came in lower than you thought. 

By contrast, an unfavorable variance indicates negative KPI results, meaning your company underperformed. This can happen for any number of reasons, including low sales numbers and various missed goals.

Common Variances

Budget variances reveal when your predictions were incorrect, giving you the opportunity to adjust. They’re neither good nor bad, but they do come in a few shapes and sizes: 

• Variable overhead variance: This variance reflects the difference between your estimated overhead and actual overhead costs. It’s specific to production costs such as material costs (machine hours) and labor costs (labor hours).
• Material variance: A material overhead variance is the difference between your projected and actual material costs. It’s specific to production and can cause manufacturing costs to rise or fall. To accommodate for this variance, your company may negotiate better trade terms or even pursue less expensive manufacturing methods.
• Labor variance: The variance reflects the difference between your estimated labor expenses and the actual cost of labor for the year. It’s specific to production and can cause revenue variances, impacting profits. To account for a labor variance, your company might seek to reduce employee overtime or outsource some work to independent contractors.

It’s common to see one or all of these when you do your calculations. Accounting for variances in your budget vs. actuals report helps you shift your priorities. 

Why Budget Variances Happen

Good or bad, budget variances happen to even the best-run businesses. Your budget vs. actuals report can reflect any one of these missteps:

• Errors:Whether there’s a typo in your budget or in your accounting software, faulty projections and actual numbers can produce budget variances. Likewise, inaccuracies regarding the costs of goods and services can throw off your revenue projections.
• Inaccurate lifecycle stage prediction: Sales matters. If the sales team closes deals faster or slower than anticipated, it has a ripple effect on your projected vs. actual income. 
• Changes in business climate: When the business world changes, expect your books to change with it. We’re especially seeing it during the COVID-19 era, where material shortages and labor costs are impacting manufacturing, and the economy has stunted sales.
• Inaccurate expectations: There’s value in being spot-on. Whether you over or underestimate annual sales, you’ll see budget variances all the same. Negative variances reflect missed sales KPIs, while favorable variances appear when the sales team overperforms.
  
  

Benefits of Budget Variance Analysis

When you understand where things went right or wrong in your budget forecasting, you can start to make adjustments to replicate successes and prevent repeating past mistakes. Breaking down your budget variance helps you gain insight into your company’s ability to create realistic budgets and perform to expectations. 

You can use the data from your budget variance analysis to make better-informed decisions:

• Increase profitability by managing expenses, from cutting discretionary spending to making budget alterations.
• Mitigate risks by comparing financial transactions and KPIs to your static budget.
• Be proactive regarding business growth by assessing the products or services your company should focus on or even discontinue and adjust sales goals based on current conditions.

Finding your business’s weak points and their ideal solutions is made much easier with accurate and detailed financial analysis and reports.

Make Budgeting and Forecasting Easy

Tired of budgeting with outdated spreadsheets? There’s an easier way. Trust a partner who’s on your side and focused on your business’s bottom line. Ignite Spot will right the ship and position your company for success. Get in touch to learn how we can help with your financial planning needs.