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Budget vs. Actuals: A budget variance analysis guide

Sasha Lamachenka

, DemandGen Manager, Abacum

6 min read ยท Published: February 23, 2023

Budget vs Actuals

Business budgets can serve as stepping stones for startup business owners to follow as they carve their pathway forward. However, while these financial practices can help a company stay on track, they don’t necessarily show how an organization is actually performing.

So how can a company ensure that they are not drifting off course? Through budget variance analysis.

Comparing budget vs. actuals allows finance leaders to assess the organization’s performance against their predicted forecast and course-correct as needed so they can continue to climb the staircase to success. In this article, our experts will be covering everything you need to know about FP&A variance analysis to help your financial team follow Financial Planning & Analysis best practices and serve as strategic decision influencers for your entire organization.

What is budget variance analysis?

Finance professionals use budget variance analysis to assess the actual performance of a business. This type of analysis also allows organizations to compare actual figures to the outlined budget from a set period and evaluate the variances between the two.

As a critical component of Corporate Performance Management, budget variance analysis ultimately allows an organization to identify where they exceeded expectations and where they fell short.

The process of comparing budget vs. actuals is straightforward. However, assessing the variance is the key step that allows finance leaders to derive actionable insights and use that information to support strategic decision-making among senior management. By evaluating whether or not a company’s spending and revenue are leading to a negative variance or positive variance, the finance team can then reassess their current budgets and create more strategic forecasts moving forward.  

What is budget variance?

Variances can be categorized as either a favorable variance or an unfavorable variance. When variance is favorable, the revenue is higher than the budgeted amount. In the case of an unfavorable variance, revenue falls short of the budget, or the actual cost of expenses is greater than the budget.

Several causes may affect an organization’s FP&A variance analysis.

These include:

  • Inaccurate budgeting
  • Changes in business conditions
  • Unmet expectations
  • Customer acquisition

If the budget variance is continuously off, the Finance team may have to reassess their current forecasting processes so they can properly assess the actual performance of the organization.

Budget variance in a flexible budget vs. a static budget

When Finance uses a flexible budget, they can make adjustments when assumptions used to create the budget have changed. In contrast, a static budget is fixed and cannot be adjusted even if future variances assumptions are altered. These changes can result in different outcomes, especially when conducting a budget variance analysis.

Why should you assess the variances between your budgets vs. actuals?

Budgeting is a fundamental practice for all financial planning and analysis processes.

By analyzing where your business surpassed expectations and where it fell short, you can then know how to pivot your financial plan in the future. With the company goals in place, the finance executive team can quantifiably calculate business performance and financial health, and inform business leaders on roadblocks, successes, and new opportunities.

Using an FP&A variance analysis allows a company to measure its year-to-date performance and see which initiatives or processes created a favorable variance. Once a budget to actual variance analysis has been performed, senior management can then steer the right actions and make more data-driven decisions to propel the organization onward.

Performing a budget vs. actual variance analysis

There are several steps involved in calculating your budget vs. actual variance analysis. Below are the different steps to consider:

1. Identify the forecasted amount

The first step is to uncover the budgeted amount. In most cases, organizations will use revenue and expenses or income to calculate this number. While traditional budget owners depend on templates or excel spreadsheets to derive their budget variance analysis, modern FP&A software can automatically consolidate data and conduct these analyses in a fraction of the time.

Aside from an organization’s income and expenses, other factors to consider include EBITDAcost of goods sold, net income, and gross profit.

2. Determine the actual amount

Next, determine the actual results of what is being analyzed. Businesses typically will use a defined period of time, such as on a monthly, quarterly, or annual basis to conduct their budget variance analysis.

3. Calculate the variance

  • Dollar variance

A company can choose to calculate the dollar variance instead of the percent variance. The formula is as follows: Dollar variance = actual amount – forecast amount

  • Percent variance

The other method is to calculate the percent variance. This can be done by using the following formula: Percent variance = [(actual amount / forecast amount) – 1] x 100

4. Derive results

Do you notice a positive variance or negative variance when reviewing results? Through the resulting outcome, a finance team can gain an inside look at their organization’s overall financial performance. From there, they can use that information to derive further strategic insights and steer financial planning forward.

5. Create management reports

Once a team has conducted its budget variance analysis, it is time to present that information to senior management, leadership, and investors. In this management and investor report, be sure to include all of the outcomes as well as the drivers so teams can gain a greater understanding of trends, patterns, or new areas of opportunity. Not only does this paint a clearer picture of the overall performance of an organization, but it also supports strategic decision-making to drive growth.

6. Update forecasts

In some cases, these new strategic insights that have emerged from budget variance analysis may mean that current forecasts need to be altered. If this is the case, be sure to make the necessary adjustments to forecasts or financial models.

As a general rule of thumb, the forecast should reflect an organization’s roadmap. If uncertain market conditions or other factors are causing a wide range of variances, your team may want to consider adjusting forecasts to reflect these shifts.

Drawing the connection between budget variance analysis & financial forecasting

So how are budget variance analysis and financial forecasting related?

Put simply, budget variance analysis helps an organization create more accurate forecasts for the future. Forecasting is a necessary part of financial planning, which is why it is so important that a finance team makes the necessary adjustments to its models and forecasts on a regular basis.

If you are looking to streamline your budget variance and financial analysis processes, consider automating your workflows with the help of a strategic finance solution like Abacum. Unlike Excel spreadsheets that require manual input to conduct analyses, our platform automatically consolidates financial and operational data into a centralized space, allowing finance teams to easily conduct their budget to actual variance analysis and derive fast and reliable business insights.

Ready to improve your cash flow forecasting through budget variance analysis?

Find out how to modernize your financial processes and request a demo today.

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