Financial Statements : Budget vs. Actual

Selina Johansson

Business planning is a vital part of maintaining and expanding your company. The finance department as well as business owners and department head spend an inordinate amount of time preparing, revising and approving the company’s budget for each fiscal year.

Of course, the process of financial management does not stop there. Financial statements give the company with a to reflect on what the company is doing according to its plans. However, one of the financial statements that you have a look at – the budget versus actual dashboard – reveals the areas where the business is not in line with the plans.

It is true that there will always be a difference in the way you plan your business and what happens during the year. When you analyze those variations, your business will be more prepared and well-informed for the future.

What’s a budget and actual statement?

The budget vs. actual statement is precisely it – a crucial aspect of financial report that reveals over a certain period of time, how your actual earnings and expenses compare to what you expected they were going to be.

The budget section of the report is evidently derived directly from the financial model you have created and the actuals come from the information in the balance sheet. This is the most crucial element of the statement, the variance of the budget.

It’s likely that there may be minor deviations from budgeted figures. Minor changes in pricing or sales, for instance, could can result in minor variations between the budgeted amount for and the actual outcomes. While these may affect your cash flow statement, minor adjustments to your plan will not significantly impact your financial situation.

What’s important to the business but is the analysis of deviations, the variances in budget explanations, and the reason for them – how were they able to occur?

What do you do with a Budget vs Actual Report?

The point where budget variances become crucial is when you have to deal with huge variations. If sales have plunged dramatically or expenses have increased dramatically it is crucial to the overall health of the company to know the reason for this.

Although the causes of variations are beyond the company’s control being aware of and analyzing these differences can help the business to make necessary adjustments to keep the company in the right direction.

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The first step when comparing budgets vs. actual variance is determine what business operations were significantly different from what was anticipated. Did manufacturing costs plummet? Did commission payments suddenly rise?

Once you’ve identified your “who” as well as the “where” that explains the variations then you’ll be able to look into what’s the “why”. For companies that rely on spreadsheets to manage their finances and budgets this may be a difficult task. It’s possible to identify where the disparities are coming from however “why” is more difficult to determine.

If you look at the opposite side, if the finance office is able to access analytics and reporting tools as part of their accounting software, which collates financial information from all areas of the enterprise and financial analysis of the causes for an increase or decrease in variation becomes clearer. Are the sales people really knocking it to the max or has it been because the big sale anticipated for the end of the year actually took place in the second quarter?

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What’s more important is why this sale occur so earlier? Was it due to a strong salesmanship? or were the products needed for production available earlier than you expected? The results of those questions will have a larger and more concrete influence on the plans you have for the remainder of the budget than simply knowing that the sales were more than you expected.

What is the reason why an analysis of a Budget vs Actual Analysis Important?

The budget vs. actual financial statement is a crucial element of data for the business however, where the true value of this report lies can be found in its analysis. With an accurate overview of not only the events that led to budget deviations, but also why they occurred, businesses will be able to stay on the right track and develop more precise plans for the future.

 

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