Understanding Budget versus Actual Analysis

A small-business budget is not much use if you don’t compare it against actual performance. This classic method of evaluating performance stands as one of the most important monthly financial reports for any company. If you perform any forecasting or budgeting, read on to learn the best practices for budget versus actual analysis.

What is budget versus actual variance analysis?

A budget versus actual variance analysis allows you to evaluate business performance against your plan, analyze the cause of financial deviations and inform appropriate management decisions. Some bookkeeping services include a budget variance analysis report, but many small-business owners will need to build their own.

If you do not have a business budget, you may choose to instead compare projected or forecast results against actual results. This has the added benefit of validating the accuracy of your forecast and improving financial planning.

Small-business owners often think budget variance analysis is meant solely for income and expenses. In reality, best practice is to perform variance analysis balance sheets and statements of cash flows, too.

Why is it a good idea to compare budget against actual figures?

Budgeting is a critical planning process, but you will never “stick to your budget.” That’s OK — the point of a budget is to set expectations you can measure performance against. Comparing actual results against budget allows you to measure your year-to-date performance, judge whether the company is trending ahead or behind plan and adjust management tactics accordingly. Without reports to measure your performance, you are flying blind.

How do you analyze budget versus actual?

Follow these six steps to build a simple variance report:

Create a new spreadsheet separate from your financial forecasts.

1. Enter your summarized or detailed income and expense accounts in the first column.
2. Enter your budgeted values for each profit and loss account for January in the second column.
3. Enter the actual values for each profit and loss account for January in the third column.
4. Create a “variance” formula in the fourth column (actual minus budget).
5. Create a “variance percent” formula in the fifth column (variance/budget).

Repeat this process for every month for the profits and losses, balance sheet, statement of cash flows and KPIs. Accounting services like CFOshare will use integration, ETL or other advanced techniques to automate this process; however, unless you are experienced at these advanced techniques, we recommend a simple manual-entry process.

Review the variance column every month. Take time to understand:

• Large variances. These are key drivers to your company’s performance.
• Consistent, reoccurring variances.This indicates budgeting or forecasting error, or lack of discipline in business management (especially for unfavorable expenses).
• Variances growing each month. This is an early warning of a growing trend management should be aware of.

When reviewing each budget vs. actual variance, ask yourself these questions:

• Is this variance good or bad for the company?
• What actions or lack of actions resulted in this performance?
• What actions should management take given this result?
• Should management stick with this strategy, invest more in this strategy or pivot to change strategies?

If you find yourself spending lots of time updating your monthly variance analysis, not understanding the results or simply not performing the analysis, you should get help. Fractional chief financial officer services can quickly and simply implement a budget to actual variance analysis tool using automation, advanced ETL techniques and software integrations. Book an appointment with one of our chief financial officers to advance your financial reports.