What are the most common budget evaluation methods?

1 Variance Analysis

Variance analysis is the simplest and most widely used method of budget evaluation. It involves calculating the difference between the actual and planned amounts of each budget item, and expressing it as a percentage or a ratio. For example, if you budgeted $10,000 for travel expenses, but you actually spent $12,000, your variance would be $2,000 or 20%. Variance analysis can help you to identify and explain the reasons for the discrepancies, such as changes in prices, volumes, or quality. However, variance analysis has some limitations, such as not accounting for interdependencies between budget items, or not capturing the qualitative aspects of performance.

2 Ratio Analysis

Ratio analysis is a method of budget evaluation that uses financial ratios to measure and compare the performance of different aspects of your budget. Financial ratios are numerical values that indicate the relationship between two or more budget items, such as revenues, expenses, assets, or liabilities. For example, you can use the profit margin ratio to measure how much of your revenue is left after deducting your expenses, or the current ratio to measure how well you can pay your short-term debts with your current assets. Ratio analysis can help you to assess the financial health and sustainability of your budget, and to benchmark your performance against industry standards or best practices. However, ratio analysis can also be misleading, as it does not consider the context or the quality of the data, and it may vary depending on the accounting methods or assumptions used.

3 Cost-Benefit Analysis

Cost-benefit analysis is a method of budget evaluation that compares the costs and benefits of a budget item or a project in terms of monetary values. It involves estimating the total costs and benefits of a budget item or a project over its life cycle, and calculating the net present value (NPV) or the internal rate of return (IRR) of the investment. For example, if you want to evaluate the feasibility of a new training program, you can estimate the costs of developing and delivering the program, and the benefits of improving the skills and productivity of your staff, and then calculate the NPV or the IRR of the program. Cost-benefit analysis can help you to determine the economic viability and profitability of your budget item or project, and to prioritize your spending based on the expected returns. However, cost-benefit analysis can also be challenging, as it requires accurate and reliable data, and it may not capture the intangible or non-monetary costs and benefits, such as social or environmental impacts.

4 Feedback Analysis

Feedback analysis is a method of budget evaluation that uses the opinions and perceptions of the stakeholders involved in or affected by your budget to measure and improve your performance. It involves collecting and analyzing the feedback from your staff, customers, partners, suppliers, or funders, using surveys, interviews, focus groups, or other methods. For example, if you want to evaluate the quality and effectiveness of your customer service, you can ask your customers to rate their satisfaction, loyalty, and referrals, and to provide suggestions for improvement. Feedback analysis can help you to understand the needs and expectations of your stakeholders, and to identify the strengths and weaknesses of your budget. However, feedback analysis can also be subjective, biased, or inconsistent, depending on the source, method, and timing of the feedback, and it may not reflect the actual outcomes or impacts of your budget.