by The comparison between actual and planned results is known as variance and it appears on periodic budget reports. Every company’s success can be partly credited to healthy record up keeping practices and crystal clear control protocols in order to conduct the business efficiently.
Internal control is key and to ensure that internal control is smooth, a budget report is extremely essential.
A budget report helps the management to compare the projections with the current state of the organization and record the deviation for further corrections. A periodic budget enumerates the major differences between what the planned results were and whether the company has exceeded or has fallen below its expectations.
Plan vs actual is just the active review and adjustment of financial forecasts based on your real-world financial results. During this process, you’ll also be reviewing your actions during that period to better contextualize your results. In accounting, this is also known as variance analysis, which is just a different term for the same concept.
A key function for the FP&A professional is to perform a budget to actual variance analysis. A budget to actual variance analysis is a process by which a company’s budget is compared to actual results and the reasons for the variance are interpreted. The purpose of all variance analysis is to provoke questions such as:
- Why are selling, general and administrative expenses higher than last year?
- Why did one division, product line or service perform better (or worse) than the others?
- Are variances being caused by execution failure, change in market conditions, competitor actions, an unexpected event or unrealistic forecast?
The basis of virtually all variance analysis is the difference between actuals and some predetermined measure such as a budget, plan or rolling forecast. Most organizations perform variance analysis on a periodic basis (i.e. monthly, quarterly, annually) in enough detail to allow managers to understand what’s happening to the business while not overburdening staff.
Comparison results are organized in a manner in which clients can review each completed task, as carried out and as planned side by side, and determine if construction unfolds according to plan, or is falling behind in certain areas or discipline.
Performing budget to actual variance analysis
Variances fall into two major categories:
- Favorable variance: Actuals came in better than the measure it is compared to.
- Negative variance: Actuals came in worse than the measure it is compared to.
When explaining budget to actual variances, it is a best practice to not to use the terms “higher” or “lower” when describing a particular line time. For example, expenses may have come in higher than planned, but that produces a negative variance to profit.
In addition, variances are relative to an organization’s key performance indicators (KPIs). If the organization utilizes a driver-based, flexible budget or plan where production costs come in higher in a period due to increased sales volume, than that may have a positive effect on organizational profit and show that in the budget to actual variance analysis.
