Published on Thursday, October 15, 2020 Show
Individuals and business owners alike set budgets to keep their spending under control and to manage their finances better. CFOs and others who work with financial reporting especially know that the proposed budget does not always match the actual numbers. That’s where a budget variance analysis can help with financial analysis and forecasting. It can give you a clear picture of whether you met your financial goals for the month, year, or quarter. What is Budget Vs. Actual VarianceThe term “budget vs. actual” refers to the difference between your static budget and the actual figures for your company’s income and expenses. The phrase budget v. actual is bookkeeping shorthand for budget vs. actual variance analysis. Your static budget does not change. It is typically determined before the start of the fiscal year based on projected income and expenses. However, line items may come in over or under their budgeted amount over a given period of time. That’s where your actual data comes from. Reviewing both types of financial reports and reviewing the differences between them in a budget vs. actual variance analysis can help you:
What are the Types of Actual vs Budget Variances?Actuals are defined as the – the actual expenses and actual income generated throughout the year that contribute to actual revenue and cash flow. The difference between the actuals and your budget reflects your budget variance. A favorable variance shows positive numbers for your key performance indicators. For instance, favorable variances may include:
On the other hand, an unfavorable variance may show:
Why Budget Variances HappenVariances can occur for many reasons, some that remain within a business owner’s control and others that are harder to avoid. Let’s explore some of the reasons for a budget variance.
Benefits of Budget Variance AnalysisAs with any type of financial analysis, completing a budget variance analysis can help you make the right decisions for your business. Reviewing financial transactions to create an actual report and then comparing KPIs to your static budget provides many benefits and insights. For instance, performing an actual vs budget variance analysis may help business owners recognize a need to cut costs and manage expenses or to adjust sales goals to reflect reality better. In some cases, you may have to adjust your budget to reflect major corporate changes. A budget variance analysis can help businesses:
Common VariancesRecognizing some of the most common budget variances can alert you of what to watch out for and areas where you may need to make budget adjustments moving forward. Remember, variances are not inherently good or bad; they just mean predictions were incorrect at any given point in time. A favorable variation refers to one in which your KPIs turned out better than predicted. An unfavorable variance could mean you want to adjust your expectations, or you may need to reduce costs or find ways to increase revenue to hit sales goals or profitability targets. Experimenting with new sales and marketing strategies may help get your actual figures where you want them to be. Let’s review some of the most common expense variances. Since expense variances can lead to revenue variances, accounting for these factors can bridge the gap between your budget vs. actual reports.
Make Budgeting & Forecasting Your Revenue EasyHave you been calculating your budget vs. actual using Microsoft Excel? revVana integrates your accounting software and financial statements with your CRM software like SalesForce across a powerful business insights and analytics platform. Minimize errors, typos, and miscalculations in your budget v. actual for a clear view of where your company stands. Request a free demo today. Get a Custom Product Tour of revVanaFind out how revVana can help you automate revenue and operational forecasts. What is the variance between flexible budget and actual results for sales?A flexible budget variance is any difference between the results generated by a flexible budget model and actual results. If actual revenues are inserted into a flexible budget model, this means that any variance will arise between budgeted and actual expenses, not revenues.
What is the variance between budget and actual?A budget variance is an accounting term that describes instances where actual costs are either higher or lower than the standard or projected costs. An unfavorable, or negative, budget variance is indicative of a budget shortfall, which may occur because revenues miss or costs come in higher than anticipated.
What is the difference between a flexible budget and an actual budget?Variances or differences in the actual budget give a small business important information about performance elements such as overhead costs and profit. A flexible budget is a kind of budget that can easily change input variables over time. It forecast revenues and expenses with a variety of activity levels.
What are the two variances that make up a flexible budget variance?A flexible budget variance is the difference between 1) an actual amount, and 2) the amount allowed by the flexible budget.
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