You built a budget, and took the time to get some actual information entered as well, and now you’re looking at your Profit: what you expected, against what your business is doing are far apart; you can see there are big differences between the two, but what next?
And don’t just stare at your Budget Report forlornly,
The power of a budget is in giving you the opportunity to find out what is really going on (versus what you hope is going on) – once you know the truth you can take action and prevent yourself from sailing on blindly into any storm.
Solution: Get your Sherlock Holmes hat on and
Do Some Analysis!
‘Analysis’ is just another word for ‘Investigation’ – this means you dig deep into the business activities to uncover the causes of this “Budget Problem“.
Variance Analysis is the financial term used for “Investigating Budget Problems” – narrowing down (analysis) exactly what has changed in relation to what you predicted in the budget (variance), so you can understand any impacts on your business and what, if anything, you need to do about it.
Many many things in business can change on a daily basis; to fix budget problems you need to ask and answer questions such as:
- Was there a good/bad decision?
- Did the market change?
- Have prices moved?
- Are customers’ needs different?
Once you have made an investigation, asked and answered the right questions, and drawn some conclusions, you are able to make tweaks and changes to get (or keep) your business on track and back inline with your budget – BUDGET PROBLEMS FIXED!
The following 5 tips walk you through the analysis path so you can pinpoint your “Budget Problem” and work out what to do next.
Tip 1. First and foremost – not all differences are bad things some can actually be good.
Up to here I have used the term “Budget Problem” in quote marks, because some variances aren’t actually due to business problems – they can be business advantages too. It is important to consider the “Budget Problem” in terms of how it has impacted the business profits:
1. POSITIVE VARIANCES – anything that boosts profits
- Better than expected result
- Costs lower than expected
- Revenue higher than expected
2. NEGATIVE VARIANCES – anything that reduces profit
- Worse than expected result
- Costs higher than expected
- Revenue lower than expected
NOTE: Budget Variances, and Variance Analysis can be VERY confusing if you simply think of negative numbers as bad and positive numbers as good – different reports will set things out in different ways and it can be easy to get caught-out. So stick to the above guidelines and always double-check:
- Is your positive variance good or bad? Knowing will really help ensure you always take action when you need to.
- Is your negative variance good or bad? Knowing will really help ensure you don’t worry unnecessarily.
i.e. You always want to be INCREASING your Revenue and DECREASING your expenses – this may sound like telling you to ‘suck eggs’ – but it is the key goal to keep in mind when looking at a variance. Don’t let the fact you are looking at numbers overwhelm you, remember the numbers are records of actual occurrences and the activities behind the numbers are trying to tell you their story.