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Track the numbers

How and why you should compare your budget to the actual outcome

by L.J. SUZUKI

Budget planning is a critical process for your business. The point of a budget plan is to set expectations you can measure actual performance against. Analyzing your budget plan compared to the actual outcome—known as a budget versus actual variance analysis—allows you to evaluate your business’s performance, analyze financial deviations and make informed management decisions. Without reports to measure you are flying blind.

Comparing your results against your budget also allows you to judge whether your company is trending ahead of or behind your plan and adjust management tactics accordingly.

Follow these steps to build a simple variance report:

• 1. Create a spreadsheet separate from your financial forecasts.
• 2. Enter your income and expense accounts in the first column.
• 3. Enter your budgeted values for each profit and loss (P&L) account for the month in the second column.
• 4. Enter the actual values for each P&L account for that month in the third column.
• 5. Create a variance formula in the fourth column (actual minus budget).
• 6. Create a variance percent formula in the fifth column (variance as a percent of budget).

Repeat this process every month for the P&L, balance sheet, statement of cash flows and key performance indicators (factors that are critical indicators of progress in an intended outcome). Accounting services use advanced techniques to automate this process.

However, unless you are experienced with these methods, I recommend a simple manual entry process. Every month, take time to understand the following.

Large variances on your P&L. These are the key reasons your business is performing differently than you planned. Ask yourself, “What decisions did my team make that led to variances?”

Consistent, recurring variances. This indicates budgeting or forecasting errors, and possibly a lack of discipline in business management (especially for unfavorable expenses).

Variances that grow over time. This indicates a business condition that is accelerating. For example, growing variances in accounts receivable indicate a customer collections issue, eventually leading to major write-offs.

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