All businesses put in a lot of time and effort into financial planning and performing budget vs actuals variance analysis is but a way to see how the business is performing against its budget.
Doing budget vs actual analysis is very much dependent on good practices that allow you to record and report all of the financial transactions. This is perhaps what makes it so difficult because it takes a lot of time for managers to collect and report these transactional details to finance. Not to mention, finance will have many questions for some of the transactions.
If finance has no good access to data, it will be impossible to see a clearer picture of how a business is performing and there will be no good way to perform further analysis.
If your company is still running on spreadsheets for your financial planning, it most likely means that your finance team spends hours and hours just trying to gather all the data they need to put in the spreadsheet. For some, this can even take several days just getting the spreadsheet ready and that is just the beginning of the many problems.
Your finance team will probably have no clue where the numbers came from or why they came to be. There is no accountability for some of these numbers and no way to gauge the accuracy of the figures either.
So say your business does not run on spreadsheet and it has an active planning process with automated data collection, what are to be learned from budget vs actual variance analysis?
The learnings from Budget vs Actual Variance Analysis
The insights that can be gathered from budget vs actual variance analysis guides your business in its strategy formulation and decision-making.
Here are 5 of the many things to be learned:
- The correctness of Assumptions
Budget vs actual variance analysis lets you see whether your growth assumptions were right. For example, for the client you assumed would spend a certain amount with you, did it turn out as expected? If not why? Did you have more people who disconnected or hopped off their subscription? Why? Did adding a new sales team generate the additional revenue you intended?
If the answer to these questions are NO – then there is so much to be learned from all the assumptions made and why they didn´t turn out as you had hoped.
- The turnout of expenses as percentage revenue
The use of percentage of revenue budget against actual comparison helps a business in its other expenses such as payroll, sales and marketing, R&D, etc.
If the percentage is reduced, it means the company is improving in its efficiency and profitability whereas inflating of the percentage could tell otherwise. Reduction in percentage helps your business and its investors predict the long-term performance of the business.
- The appropriateness of Spending
In any business, financial discipline is key. It is very important to look at why a specific vendor provided a service cost that is more than budgeted. You need to be able to speak to them where the difference is coming from and why.
The same is true with all the employees of the company, each one must be held accountable through good internal policies that control these spendings. Of course, each expense must be carefully weighed against the well-being of the employee who incurred the expense and how the company benefits from this spending.
- Consistency of margins
It is important to review budget variance on a regular basis in order to see a potential concerning trend. Even though the sales numbers turn out as expected and the product or service seems rather well accepted, budget variance analysis could sometimes show that there is decrease in profit margins. Seeing a trend like that through variance analysis calls for an internal discussion on the ability of the business to take in lower profit margins or if something else needs to be done.
Without variance analysis, it is easy to get tricked that everything is going smoothly by just basing on sales figures. Therefore, variance analysis is necessary in order to sustain growth and maintain alignment.
- Evaluation of product lines or services
Budget vs actual variance analysis gives you a good opportunity to look at how each of your budgeted product or service is performing against budget and whether or not the spending should maintain the same.
Variance analysis lets you evaluate your sales and marketing focus in order to truly maximize profitability.
Budget vs Actuals Variance Analysis with Performance Canvas
Performance Canvas is one of the most revolutionary cloud FP&A solutions in the market today. It takes only 5 minutes to install and configure and you immediately get budgets, actuals, and live forecasts after the short wait.
On top of it being a complete cloud FP&A solution able to handle reporting and analysis, budgeting and planning, forecasting, financial consolidation and metrics management, Performance Canvas employs best practices within the solution such as live forecasting, actuals vs budget variance analysis, driver-based budgeting, multiple assumptions, unlimited what-if analysis, and more.
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.