Budget vs. Actuals: How to analyze for better forecasting

As a startup, you know managing your finances is essential to reaching goals and continuing to grow. Accurate financial data and forecasts can be the difference between sink or swim.

So you've created a budget and are ready to go — but what's next?

A budget is only as good as the plan you have in place for monitoring it. Without tracking your actuals against your budget, you won't be able to forecast or model future financial goals accurately.

With the proper analysis of your budget vs actuals, you can gain valuable insights into how well you're meeting your financial goals and make adjustments accordingly. As a result, your financial forecasting and modeling will be more accurate, and you'll better understand your cash flow.

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What is budget vs actuals?

At its core, a budget vs actuals analysis compares the amount of money you expected to spend — your budget — and the amount you ended up spending — your actuals. You can assess your financial performance by examining how closely those two numbers match up.

Your budget is a plan for how your company expects to allocate its resources. It's typically created at the beginning of a fiscal year and serves as a roadmap for achieving financial goals.

Actuals, on the other hand, are what happens. Actuals represent the amount you spent or earned throughout a fiscal period.

Why do both your budget and actuals matter?

Your budget and actuals are vital for understanding your financial performance. By comparing the two, you can see how closely you followed your financial plan and identify areas where you may have gone over or underspent. This information can help you pinpoint variables affecting your financial performance so you can adjust accordingly.

Comparing your budget to actuals can also help you stay on track to achieve any financial goals you've set for your organization. In addition, it provides crucial insights into your cash flow, which can be critical for businesses with tight margins.

How to calculate budget variance

Variance is the comparison of your budget and actuals. To calculate it, you'll need to know two things: how much you budgeted and how much you spent.

Budget vs actual variance formula

There are two ways to calculate budget variance: percentage variance and dollar variance.

Percentage Variance Formula

(Actual / Budget ) – 1 = % Variance

Dollar Variance Formula

Actual - Budget = $ Variance

Depending on your financial goals, you can use either formula to calculate your budget variance.

For example, the dollar variance might be useful if you're trying to reduce costs and minimize expenses.

On the other hand, if you're aiming for a particular growth rate or want to compare performance between two different periods, then the percentage variance would be more helpful.

Types of budget variances

You can use different financial metrics to calculate budget variance. These include revenue, gross profits, and spending.

Some examples of expenses to add to your budget variance analysis are fixed expenses, labor costs, material costs, and manufacturing costs. As these costs fluctuate with the market and production, you'll need to account for them accordingly.

You can also look at forecasted net burn vs. net burn. This metric measures the difference between the amount of cash you projected to spend and the actual amount you burned through in a given period. An accurate picture of your net burn can help you plan financially and avoid potential cash flow problems that may threaten your sustainability.

What causes an actual vs budget variance?

Budget variance can occur for a variety of reasons. These include the following:

1. Market volatility or change in market conditions: A shift in the economic climate can lead to unexpected expenses or changes in revenue through increased interest, taxes, and other costs. When the economy is uncertain, demand for products and services might also decline, leading to a decrease in revenue.

2. Unforeseen expenses: Unexpected costs such as repairs, services, or materials may be needed on occasion, leading to an increase in expenditures.

3. Inaccurate data: Bad data can come from outdated financial software, reports' incorrect information, or manual data entry errors. When founders use inaccurate data, business decisions rely  on faulty data and forecasts. Budget variance can thus result from overspending or underspending resources.

4. Miscommunication: If there is miscommunication between departments or teams, it can lead to discrepancies between the budget and actuals. For example, if one department is unaware of budget changes, it may spend outside the allotted amount. A budget variance will result when a team's budget is insufficient to cover its costs.

Regularly review your budget and actuals to ensure they remain in sync so that you can make informed decisions about your financial performance.

Reading a budget vs actuals report

A budget vs. actuals report is a financial document showing how closely you followed your spending plan for a specific period. It includes three columns: actuals, budgeted amounts, and percentage changes. The report will summarize revenue, expenses, net income, and gross profits.

Budget vs actual report example

It's not difficult to learn how to read a variance report, but it may take some familiarization. Fully understanding how budget vs. actuals data operates can help you better interpret the results. Let's look at an example to see how to read a budget vs. actual report.

How to conduct a budget vs actual analysis

To conduct your budget vs. actual analysis, you'll begin with your financial reports. Make sure they are complete and reconciled, as accurate and complete data is essential for proper budgeting.

You'll use the information from these reports to look for two types of variances: favorable and negative.

A favorable variance occurs when the actuals positively influence the budget, meaning you spent less than you planned and earned more than expected.

For example, if you budgeted $10,000 in materials for the month and only spent $7,500, you have a favorable variance of $2,500.

A negative variance occurs when the actuals negatively influence the budget. In this case, you may have spent more than planned or earned less revenue than expected.

For example, if you budgeted $10,000 in materials for the month and spent $12,500, you have a negative variance of $2,500.

After calculating your variances, you can use either spreadsheets or specialized software to manage and analyze them. Each method has its pros and cons, so consider your own needs and the size of your organization when making a decision.

Spreadsheets can be a great place to create and manage a budget since they’re quick and easy to use. Some additional benefits of using spreadsheets are:

• Familiarity: Excel and other spreadsheet programs are widely used and easy to learn.

• Customization: Spreadsheets allow you to customize your data input, formulas, and reports.

• Cost: Spreadsheets are usually free or low-cost, depending on your chosen program.

At the same time, spreadsheets can also have some drawbacks. They can be:

• Time-consuming: Data entry, calculations, and reports can be tedious and take lots of time to do manually.

• Functionally limited: Spreadsheets do not offer the same level of automation or advanced features as other software programs.

• Error-prone: Spreadsheets can be prone to errors due to manual entry and calculations.

On the other hand, budgeting or accounting software can offer greater efficiency and more advanced features. Here are some reasons to choose software:

• Automation: Budgeting software can automate many steps in budget variance analysis, including data entry, calculations, and report generation.

• Advanced features: Budgeting software gives you access to advanced features for more complex budget vs. actuals analysis. These features can include data visualization, forecasting, and financial modeling.

• Accuracy: Software is less prone to errors due to automation and greater accuracy in calculations.

• Collaboration: Teams can easily collaborate on a budget vs. actual analysis when using budgeting software. Features like real-time data updates and document sharing help to ensure everyone is on the same page.

Despite the many advantages of using software, you should note some drawbacks:

• Cost: Budgeting software can be expensive, so it may not be feasible for smaller organizations or those on a tight budget.

• Learning curve: Software can take some time to learn and get used to, as you and your team members will need to get familiarized with its features and user interface before using it effectively.

• Technology dependency: If you rely on budgeting software, you may be at risk of losing data or being unable  to access the software if something goes wrong with your computer or internet connection. However, cloud-based software can eliminate this concern.

Using spreadsheets or software for budget variance comes down to how much data you have to manage, the complexity of your analysis, and your budget. Both options can be practical tools for managing variances, but budgeting software can offer greater efficiency and more advanced features.

What do you do when your budget and actuals don't line up?

Negative variance indicates issues you should address. Whether it's gathering more accurate data to create your budget, implementing better cost control measures, or adjusting your forecasts and plans, you must take action.

When you discover negative variance, the first step is to find out what caused it. You may need to compare the budget and actuals line-by-line or look for any discrepancies in forecasting. Once you've identified the source of the variance, you can start analyzing why it occurred and how it will affect your budgeting in the future.

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