Making a financial plan for your business is all well and good, but without comparing your actual vs budget financials, you may be missing important opportunities to analyze and improve.
However, some business owners may still not be taking advantage of this powerful technique or may not understand how it works.
Read on as we explore how actual vs budget reporting can provide valuable insights and how to apply it yourself.
What is Actual vs Budget Reporting?
As the name suggests, actual vs budget reporting is simply the process of comparing your actual, real-life income and expenses with the amount budgeted during your monthly, quarterly, or yearly planning.
For example, you may have budgeted a certain level of expenses for advertising or payroll or expect a particular amount of sales. But when reviewing what you ended up paying out over a certain period, you might find a substantial difference, either higher or lower.
What is the Purpose of This Type of Analysis?
Budgeting is vital to the success of any business, so it’s crucial to correct any off-track categories as soon as possible.
When it comes to costs, owners or managers may find they’ve budgeted too little compared to actual expenditures. This would be considered an unfavorable variance. Adjustments will require them to set aside more for the future or alter operations to bring costs back in line.
On the flip side, areas of the budget that come in under the expected amount would be considered a favorable variance. When you have extra funds, you can downsize or redeploy the budgeted amount.
For income, higher-than-expected actual receipts will provide business leaders with a chance to take more profits or reinvest in growth. Lower income than what you budgeted for is an important sign that something is awry with sales or operations.
In other cases, you may find your actual expenses relatively close to your expected ones, a good sign your business is on track.
Steps to Analyzing Progress in Your Business with Actual vs Budget Reporting
Doing a business analysis through the lens of actual vs budget reporting is fairly simple. With these straightforward steps, you’ll be able to evaluate all aspects of your budget in short order.
Collect Your Financial Data
This can be the most time-consuming and tedious step, especially for businesses that haven’t been keeping good records over time – another reason good bookkeeping is crucial.
Once you’ve collected receipts, invoices, and other data on your expenses and earnings, tally them up to come up with your actual income and expenditures over a period of time of your choice.
Create a Clear Budget
If you don’t already have a budget, now is the time to make one. Figure out what you can reasonably set aside for various expenses like rent, cost of goods sold, payroll, and various other categories. At the same time, determine what you can generally count on in terms of income. This is known as budget forecasting.
At a minimum, most businesses seek to balance these, though more income than expenses is obviously the goal.
However, some organizations may be OK with running a deficit in their current budget in order to grow or invest in the company for the long term.
Regardless, determine your budget and ensure decision-makers understand it and its goals.
Track Your Actual Performance
Tracking your performance is one of the simpler steps of the process. Just ensure you’re following the basic principles of accounting and records management, and you should have no trouble.
For certain areas you want to place extra focus on, it can help to keep a running tally over time. Make sure to note if there are any out-of-the-ordinary financial transactions, like an unexpected sales boom or a one-time equipment upgrade.
Compare Your Actual Performance Against Your Budget
Once a defined period of time has passed, take another look at your actual financial data and compare it to your projection. As an example, have a look here at the Financial KPIs file we send PlotPath clients monthly, which includes budget vs actual variances. Again, diligence is key here – don’t leave anything out. It’ll quickly become clear which categories of your budget are close to reality and which will need to be adjusted going forward.
This is the single most important step, so don’t rush through your analysis.
Once you’ve made your budget tweaks, it’s time to start the cycle all over again! Budget vs actuals analysis is a continual process that can keep your business lean and refined for years through all sorts of economic conditions and other factors.
Benefits of Analyzing Progress in Your Business with Actual vs Budget Reporting
So why should you take the extra time to do this type of reporting?
- For one, it’s a vital way to pinpoint areas where you’re over or under budgeting – each of which has downsides for the growth and health of your business.
- Over time, the results of your actual vs budget reporting can also help identify trends that tell important stories and keep an eye on critical financial or business goals.
- Plus, better budgets mean more predictability, something almost every company would like to count on.
Need Help Incorporating Actual vs Budget Reporting into Your Business?
Actual vs budget analysis and reporting isn’t just a good practice for businesses – it’s an absolutely vital one for those who want to grow and thrive for years to come.
By simply checking your real income and expenditures against your expected ones, you can learn valuable lessons. But many business owners would prefer to focus on their work and leave the business analysis to others. If this sounds like you, contact us today to learn more about how we can help get your budgeting on track with this straightforward but effective reporting.