Budgeted Vs Actual Variance

Budget vs Actual Variance:

• The term “budget vs. actual” refers to the difference between static budget and the actual figures for company’s income and expenses. The phrase budget v. actual is bookkeeping shorthand for budget vs. actual variance analysis.
• Static budget does not change. It is typically determined before the start of the fiscal year based on projected income and expenses. However, line items may come in over or under their budgeted amount over a given period of time. That’s where your actual data comes from.

Reviewing both types of financial reports and reviewing the differences between them in a budget vs. actual variance analysis can help:

• Adjust budget for the next year for more accurate financial reporting
• Spot areas where we can cut expenses or increase income
• Determine if we may need to seek additional financing and how much.

Types of Actual vs Budget Variances?

• Actuals are defined as the – the actual expenses and actual income generated throughout the year that contribute to actual revenue and cash flow. The difference between the actuals and your budget reflects budget variance.

A favorable variance shows positive numbers for key performance indicators. For instance, favorable variances may include:

1. Greater sales than forecasted
2. Higher income than projected
3. Lower expenses than predicted in static budget

On the other hand, an unfavorable variance may show:

• Lower sales than predicted in financial forecasts
• Missed goals for specific KPIs (Key Performance Indicator)
• Higher actual expenses than budgeted for

Why Budget Variances Happen?

Variances can occur for many reasons, some that remain within a business owner’s control and others that are harder to avoid. Let’s explore some of the reasons for a budget variance.

1. Errors:

• A static budget containing errors or faulty projections can lead to a budget variance from actual results. Similarly, errors in actual numbers can cause discrepancies in actual comparison.
• Errors may stem from typos in the budget or actual reports or incorrect data entered in accounting software.  False assumptions about the costs of goods and services or about company’s manufacturing capabilities can also lead to incorrect revenue projections.
• Inaccurate lifecycle stage predictions – where the sales cycle takes more time or less time than expected – can also affect sales and, as a result, create a difference in projected income or cash flow vs. the actual amount.

2. Changes in the business climate or manufacturing costs:

• As much as CFOs work hard to predict accurate sales figures and expenses, some unforeseen factors can create a budget variance.
• For instance, raw materials or labor costs could go up or down, leading to higher or lower manufacturing costs than reflected in the static budget. Economic changes and global trade policies may lead to different sales figures than expected or a reduction in sales growth. Technology disruption or innovations in the marketplace can also affect sales as an unexpected competition.

3. Inaccurate expectations:

• CFOs sometimes miss the mark on sales forecasting, which can lead to a budget variance. Not meeting sales KPIs can result in a negative variance.
• On the other hand, if the sales team exceeds expectations, ready to face a favorable variance in financial statements.

Benefits of Budget Variance Analysis:

• Budgeting forces the management to study about the problems relating to the timely implementation. It generates a sense of caution and care among the line managers
• It guides the management relating to the planning and formulation of policies
• Budgeting provides a means of controlling income and Expenditure of a business. It gives a plan for spending.
• Budgeting helps in directing both capital and revenue resources in a profitable way.
• It discloses the weakness inefficiency and deviation in an organization promptly and provides a means to overcome them for the purpose of achieving goals
• As with any type of financial analysis, completing a budget variance analysis can help to make the right decisions for business. Reviewing financial transactions to create an actual report and then comparing KPIs to static budget provides many benefits and insights.
• For instance, performing an actual vs budget variance analysis may help business owners recognize a need to cut costs and manage expenses or to adjust sales goals to reflect reality better. In some cases, we may have to adjust budget to reflect major corporate changes.

A budget variance analysis can help businesses:

• Discover ways to increase profitability
• Mitigate risks
• Be proactive about business growth opportunities.