The term is thrown around by wall street analysts and small business owners on a regular basis. But, what is an actual Budget vs Actual Analysis and why is it important? If you are a small business owner looking to increase your company's profits, this article is for you!
What is Budget vs Actual Analysis?
Budget vs Actual analysis is really just a comparison of your company’s planned financial transactions for a given time period (budget) and the final financial results of that period of time, after all is said and done (actual). The results can be stated as a percentage or as the overall cash value of the variance.
By comparing the budgeted figures to the actual transactions for a given time period, you can get a quick glance at your businesses performance. In order for this report to be useful, make sure you have the ability to drill down where your numbers were off so you know the root cause of the variance.
Why A Budget vs Actual Analysis Report Is Important
The whole idea behind this report is to address variances in a timely manner. Most businesses wait till the end of the quarter to review their financial performance. By reviewing your budget vs actual analysis on a biweekly or monthly basis, you still have time to make necessary adjustments. Variances can occur for a number of different reasons. Some you can control, others you cannot. Say for instance, you are a contractor and the price of lumber rises due to a recent hurricane. There is no way of forecasting this beforehand, but by seeing the difference in material cost now, you can raise your own prices to maintain proper margins.
Once you understand where things went right or wrong, you can start to make adjustments to replicate successes and prevent repeating past mistakes. Breaking down your budget variance on a regular basis helps you gain insight into your company’s ability to create realistic budgets and perform to expectations. Performing regular budget vs. actual comparisons will reveal trends in your operations that could otherwise go unnoticed. You can use the data from your budget variance analysis to make informed decisions on things such as budgeting alterations, discretionary spending policies, or products or services that your company should double down on or possibly abandon altogether.
Gaining insight into your company's financial situation and making the necessary adjustments is a never ending task. If you need help preparing budget vs analysis reports, cash flow forecasts, financial statements or ad hoc reports, Still Water Financial Operations is here to help! We help businesses all across the US get a better understanding of their financial situation and prepare a game plan on how to improve it. For more information on our services and how we can help, check out this short video here. Be sure to reach out at 864-634-4004 or comment below.
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