Oh No – it doesn’t look like I thought it would!!!
Don’t Panic – you can fix budget variances!
You built a budget, and took the time to get your actuals entered.- Now you can see there are differences between the two…
How to fix budget variances? …. Don’t just stare at your Budget forlornly!
Tackle your Budget by working out exactly Where the problem is – then you can work out What, When, Why, and How to get all the information you need to deal with it.
Tip 1. WHERE are the Variances showing?
First identify which line items are out of whack, and then we can drill down further, this can be done simply by running your finger down your report and highlighting the areas that are different from what you expect.
Are there issues with Revenue are the issues with Costs, or is it the totals that have gone awry?
Establishing where there is a variance is important and reviewing what has happened against both what you were hoping for, and what you have done before helps examine how your business is tracking and how accurate your planning is.
A. Specific variances – actual figures v expected figures – this includes
- Actual v budget
- Actual v Forecast
It is unlikely that you will be perfect at budgeting (unless you have a crystal ball), so you are bound to get variances at least occasionally. Generally, small variances are simply part of doing business, large variances need investigating – but don’t get complacent; think of it like testing for lumps, or checking moles – you need to get a foundation of what is NORMALLY a bit over or a bit under before you can understand WHAT IS ODD… and this only comes with practice.
B. Trend variances – small, continual changes over time, that incrementally diverge from expected.
- this month’s v last month’s
- August 2020 v August 2021 – both acutals and budgets
What can seem normal, can seem so because we are used to it. Trend analysis is a bit like watching your weight; when you check your scales each day, it only seems like tiny changes, but if you look at this birthday compared to your weight last birthday that is when you notice the few extra kilos have snuck on … Trend analysis puts a spotlight on the changes that creep up on us little by little.
Tip 2. WHAT kind of Budget Variance do you have?
A very Key Point to consider here: – not all variances are bad things some can actually be good.
The trick at this point, is that for budgeting purposes it is important to consider the budget variance in terms of how it has impacted profits:
1. POSITIVE VARIANCES/IMPACTS – anything that boosts profits
- Better than expected result
- Costs lower than expected
- Revenue higher than expected
2. NEGATIVE VARIANCES/IMPACTS – anything that reduces profit
- Worse than expected result
- Costs higher than expected
- Revenue lower than expected
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 your reports; don’t let the fact you are looking at numbers overwhelm you, remember there are facts and activities behind the numbers that are trying to tell you their story)
NOTE: this step can be VERY confusing if you simply think of negative numbers as bad and positive numbers as good – especially as different reports will set things out in different ways and it can be easy to get caught-out. So to fix budget variances stick to the above guidelines to first stop and check if a variance is good or bad so that you ensure you always:
- take action when you need to
- don’t worry unnecessarily