Congrats! You’ve made a master plan for your business. Your team is qualified, and your budget is prepared. But, after the first quarter, the money doesn’t align with your projected budget. When this happens, it’s known as a budget variance. Budget variance is the deviation from expected expense or revenue amounts for a defined period of time. This might make managers begin to panic, but it’s important to realize that variance is a real-world factor that’s to be expected. Keeping this in mind, it’s easy to question the need for even developing a budget when nothing seems to go as planned. But remember, you still need a measurable game plan, even if you don’t achieve every target. Understanding how variance plays a role in your finances will help you avoid costly pitfalls and spearhead improvements throughout your organization.
What is Budget vs Actual?
A budget is a financial plan that provides an estimate of expenses, cash flow, and revenue for a certain period of time. There are many types of budgets — master, operating, department, and capital. They all provide a framework of what the finances could or should look like. This helps managers pinpoint where to cap expenses to avoid profit loss and maintain fluid operations. While it’s important to stick within a budget, companies usually experience some form of budget variance. When accounting periods end, companies must compare accrued costs and revenue to the starting budget. When finances do not conform to the starting budget, this is called variance.
Actual is a term that reflects the exact amount of expenses or revenue you experienced for the defined period of time that your budget covers. If a budget serves as an estimate, the actual is the final result. For
What Causes Budget Variance?
Companies will usually have a variance that reflects going over budget due to costs and unanticipated expenses, which is unfavorable. However,
Here are examples: If sales brought in more money than
Why Bother with a Budget?
All factors, good and bad, can reshape your budget – which is why you have a budget. If you don’t plan for expenses and revenue, you can’t effectively organize company operations. Creating a budget gives you the agility to prioritize expenses, cognition of financial strengths and weaknesses, and an overall view of financial health.
Comparing your actual costs with budget estimates can help you pinpoint areas of income leak that wouldn’t be possible without a target financial figure. The only way to improve the efficiency of your company is to have goals to measure against. Yet, this doesn’t mean a budget can’t be flexible, remember, it’s a plan. If your business is struggling to maintain one aspect of the budget, perhaps you haven’t allotted an appropriate amount for certain expenses. This is something you can uncover by monitoring your accounts and maintaining an up-to-date accounting system