Just about every industry and hobby has its own hodgepodge of buzzwords and jargon. Accounting is by no means an exception to this rule. While these dastardly, long-winded terms can often be a source of consternation for those trying to get a grasp on an unfamiliar subject, they do actually exist for a purpose. In pursuit of shedding some light on the wonderful world of accounting (and hopefully scaring off a few cockroaches), we’ve put together this post for demystifying one such term: “budget vs. actual.”
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What is Budget vs. Actual?
“Budget vs. actual” is just a shorter way of saying “budget to actual variance analysis.” It is also sometimes called a budget variance analysis. No matter what you call it, it’s really just a comparison of your company’s planned financial transactions for a given time period (budget) and the final financial results of that period of time, after all is said and done (actual). Budget variance can be expressed as a percentage or as the total cash difference between budget and actual numbers.
Comparing the total difference between budget and actual is great for getting a quick look at your business’ performance, but the real value of a budget vs. actual analysis is in the details. Budget to actual reports should be itemized down to a useful granularity, allowing your company to gain insights into the specifics of each facet of your company’s financial situation. A proper level of granularity in budget variance reports gives you information regarding not just the variations, but the reasons behind them.
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Why is Budget Variance Analysis Important?
The whole point of analysis is to discover the “why” behind each failure and success. Finding variances is a simple matter but discovering the reasons behind them isn’t always so easy. Sometimes, bad budgeting is the culprit behind budget variance. A few adjustments to your budgeting can help bring budget vs. actual comparisons in line. Other times, the reasons for variance are much less in your control such as situations in which the price of helium sees a sudden upturn which causes the cost of production to balloon (thank you, I’m here all week) past its budget.
Once you understand where things went right or wrong, you can start to make adjustments to replicate successes and prevent repeating past mistakes. Breaking down your budget variance on a regular basis helps you gain insight into your company’s ability to create realistic budgets and perform to expectations. Performing regular budget vs. actual comparisons will reveal trends in your operations that could otherwise go unnoticed. You can use the data from your budget variance analysis to make informed decisions on things such as budgeting alterations, discretionary spending policies, or products or services that your company should double down on or possibly abandon altogether.
Seeking out troubled areas of your business and then finding solutions to those woes is a never-ending process made much easier with the aid of accurate and detailed financial analysis and reports.
If you could use some help putting together financial reports, such as cash flow statements, managerial account reports, or budget variance reports, Ignite Spot is here to help. In addition to financial reports, we provide all kinds of outsourced accounting services to help your company thrive.