Financial Statements: Budget vs. Actual

Article by Jason Lin, MBA , CFO.

Financial planning is an important piece of sustaining and growing your business. The office of finance, business owners, and department heads spend an immense amount of time creating, reviewing and approving the business’s budget for the fiscal year.

Of course, financial management doesn’t stop there. Financial statements provide the business a point in time reflection on how the business is doing in relation to its plan. However, one financial statement – your budget vs actual statement – shows where the reality of the business has deviated from the plan.

The truth is, there will always be differences in what you plan versus what happens throughout the year. But in analyzing those differences, the business can be better prepared and more informed for the future.

What is a Budget vs Actual Statement?

Your budget vs actual statement is exactly that – an important part of a business’s financial reporting that shows, for a period of time, what your actual income and actual expenses look like compared to what you thought they would.

The budget portion of the statement obviously comes from your financial plan, while the actuals are derived from the details of the income statement and balance sheet. This creates the most important piece of this statement – the budget variance.

It’s expected that there will be small variances from the budgeted amounts. Minor changes in pricing, sales and so forth result in a few differences between what was planned for and the actual results. While these can impact your cash flow, small alterations to your plan won’t massively affect your financial position. 

What is important for the organization, however, is the analysis of the variances, the budget variance explanations – why did they happen?

What Do You Do With a Budget vs Actual Report?

Where the budget variance becomes important is in dealing with large differences. If sales have dropped dramatically, or costs have skyrocketed, it’s critical to the health of the business to understand why that happened. 

Even when the reasons behind variances are outside the control of the company, having visibility and analyzing the differences will empower the organization to make adjustments to keep the business on track.

The first step to take in budget vs. actual variance analysis is to understand what business activities deviated significantly from what was expected. Did manufacturing costs plummet? Did commission payouts suddenly increase?

Once you’ve pinpointed the “who” and “where” of the variances, you can begin to dig into the “why”. For businesses operating off of spreadsheets for their budgets and financial statements, this might be a challenge. It may be easy to see where the differences come from, but “why” will be harder to find. 

If, on the other hand, the office of finance has access to reporting and analytics tools with their accounting software that collates financial data from across the business, the financial analysis of the reasons for a positive or negative variance becomes clearer. Is the sales team really hitting it out of the park, or is it that a large sale that was expected late in the year actually came through during Q2? 

More importantly, why did that sale come in early? Was it great salesmanship? Or were the materials for manufacturing available sooner than expected? The answers to those questions will have a bigger, and more direct, impact on your plans for the rest of the budget period than just knowing sales were higher than expected. 

Why is a Budget vs Actual Analysis Important?

The budget vs actual financial statement is an important piece of intelligence for the organization, but where the real power of this report comes from is in its analysis. With a full picture of not just what happened to create budget variances, but why they happened, the business can stay on track, and make more accurate plans for the future.

This article first appeared on Centage's local blog here.

Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.