How do you identify budget differences?

Identifying budget differences involves comparing and analyzing financial data to determine variations between planned or expected budgets and actual spending or income. This process is crucial for financial management, decision-making, and course correction. Remember that budget differences are a natural part of financial management. The key is to use the insights gained from analyzing these differences to make informed decisions and improve the organization's financial performance over time.

As a Finance Lead, navigating budget differences is more than comparing numbers; it's about interpretating the financial narrative. Favorable or unfavorable, these variances are key indicators of operational efficiency and financial health. The fascinating aspect lies in their contextual interpretation, varying for different stakeholders. Proactively addressing budget differences requires transparent communication, regular reviews, and dynamic response strategies. In essence, these variances tell a story of a company's financial resilience, strategic effectiveness, and the collective efforts of its team."

The variances should be used to improve the business and future budgeting. I like to explain it as, if it's good different do more of it and if it's bad different do less of it and fix it. Good budgeting provides clarity, visibility and certainty to any business and should be encouraged. It also allows you to establish the funding required going forward. Without a budget that is impossible, as is running a business without a budget - you are running blind and aimlessly. I teach business owners all of this and the Know Your Numbers website has a lot of free information and videos on the subject. Similarly, I am always happy to have a chat and assist anyone who is struggling in this vital area.

Budget differences, also known as budget variances, are the deviations between the budgeted and actual amounts of revenues, expenses, or other financial indicators. There are two main types of budget differences: favorable and unfavorable. A favorable budget difference means that the actual result is better than the budgeted one, for example, higher revenues or lower costs. An unfavorable budget difference means that the actual result is worse than the budgeted one, for example, lower revenues or higher costs. Depending on the context and perspective, a budget difference can be favorable or unfavorable for different stakeholders.

Budget differences are a key aspect of managing personal finances effectively. When we create a budget, we're making a plan for how we'll use our money. But sometimes, what we plan doesn't match up exactly with what actually happens. That's where budget differences come in. Understanding these differences helps us make better decisions with our money. It's like keeping a score of how well we're sticking to our financial game plan. By paying attention to budget differences, we can identify areas where we're doing great and areas where we need to improve. This way, we can work towards achieving our financial goals and making the most of our hard-earned money.

Understanding why the variance has arisen is vital and more imporantly what action needs to be taken as a result. Variance should not be looked at in isolation. As stated there are many reasons including: poor budgeting, changing circumstances, client changes, poor operational performance or delivery, delays and inaccurate pricing/quotations. It is vital to understand these and more importantly the impact and what action needs to be taken going forward.

Once pricing is recieved on a project, is important to categorize what areas of the budget changed beyond an acceptable norm to gain knowledge on what categories have been budgeted poorly due to assumptions or quickly changing price structures, so future project budgets can be more accurate. Similarly, if there are categories that are continually over budgeted, knowing you may be able to reduce those categories in the future can make your company more competitive for future work or projects.

New norms in existing scenario can also cause budget differences. Such as New Regulatory System which could be beneficial to you but was not known while preparing budget.

A project budget reflects the knowledge and assumptions we have at that given time. A baseline budget is often influenced by various factors and constraints like aimed to win competitive bids or meet a fixed upper limit. When comparing baseline budgets to Estimate at Completion (EAC = Actuals + Estimate to Complete/Forecast), we may find different reasons for the variances. Some of the reasons for an unfavorable budget could be inaccurate definitions of complexities and assumptions that could result in higher labor or non-labor costs. These risks are higher in Fixed Fees and lower in Time and materials type contracts. Therefore, regular and accurate forecasting is essential to reduce the chances of negative and unfavorable budget outcomes.

In my experience it’s very important to address ‘why’ of variations. Line wise quantification gives confidence to both business and approver.

In the world of Financial Planning and Analysis (FP&A), budget differences pack a punch. They trigger changes in how we do things, from strategies to where we spend money. These differences also help us get better at predicting the future and talking with people who care about our organization. By dealing with budget differences, we’re like financial superheroes, using data to make things work out well…

Big Budget lines differences (budget vs actuals) may show either inaccurate budgeting or change in priorities of the Organization. A regular revision may lead to adjustments in budget lines to avoid major disruptions in the operation.

Utilizing the variances in the benchmarking process is crucial in assisting in identification of issues that lead to changes and identification of goals and actions needed.

There are many direct tangible impacts from budget differences, such as: resources allocation, target-oriented costs (e.g. agent commission %, bonus pay out %, etc.), future investment decisions, cash flow planning, and so on. More directly, we need to revisit the budget and reflect the reality as much as possible. In mid to long term, budget differences can also teach us lessons in building better budgets in future budget cycles, from both internal and external perspectives, with both business factors and financial technical factors considered.

The best way to analyze budget differences is by properly defining your assumptions when developing your budget. Your variance must be analyzed in individual pieces (via KPIs), comparing the actuals of your assumptions against your original assumptions. Once the budget is set, you must continue to report on the KPIs against budget. For example, if you assumed a certain DSO while budgeting for cash, you must understand what your current DSO is to identify if its overall sales deviations that are driving the variance (market conditions, etc), or potentially a drop in collection speed (could be an internal process failure). Comparing actual KPIs vs assumptions will allow you to further refine where your variance is stemming from.

It’s important to put the story at first place itself before talking about numbers. Story should include overall impact on all elements of PL and CF. This avoids repeating same reasons again in multiple lines. Any remedial action can also be included in the story itself. This would give the positive start of budget meeting.

Understanding budget differences is a fundamental step in comprehending deviations and responding effectively. To analyse these differences, compare actual and budgeted amounts, calculate variances and percentages, and identify whether they are favourable or unfavourable. Categorize the variances as volume or price-related, investigate their causes and impacts using relevant data, and communicate the findings and recommendations clearly to stakeholders through concise reports and charts.

I worked for an oil company subsidiary in the downstream sector. Heavy emphasis was put on 'factor analysis' of budget differences in the monthly reporting, to very tight deadlines. By understanding and then quantifying the factors, sharply focused management action could be prompted, to address problems and/or promote improved business performance. The combination of perceptive analytical skills, deep understanding of the business and its environment and clear communication to colleagues (including non-financial) is key to the primary value-add of a Management accounting team. Even more fundamental is that the results of well applied factor analysis are one of the main operational reasons for sound, cogent budgeting.

Understanding business processes is one of the key aspects before analysing the budget. The budget was prepared with determined targets from various departments. Different strategy approaches for marketing, price optimisation, economic condition, and unexpected events could cause budget differences. This could be a better or worse performance. The analyst could explain by detail measurements to tabulate the impact on revenue or cost per month/year, in percentage by visualise a table, chart, and concise report. Detailed findings and valuable feedback may support Stakeholders' decision-making for future plans and improvements.

Variances should be reviewed (as a minimum) every month when analysing and reviewing the monthly management accounts. It is importnat to understand why the variance has arisen and what it means in terms of performance, cash flow and future funding.

Also, providing disclosures and brief notes on anomalies, large variances, and/or upcoming changes can help stakeholders decipher what's going on with the business and what decision(s) if any are necessary.

Drawing from my own experience, I've found that using standardized formats like budget variance reports is not just about numbers but about telling a story. For instance, when presenting to our management team, incorporating visual aids like graphs or waterfalls helped convey complex information clearly. Personalizing the message for different audiences, such as tailoring recommendations for specific teams, has proven effective in driving understanding and action. These anecdotes emphasize that reporting budget differences isn't just a routine task but an opportunity to engage and inform stakeholders with real-world insights.

Waterfall bridge charts are a powerful visual tool for budget difference reporting. They break down variances step by step, making it easy to identify key drivers. They highlight positive and negative impacts, aiding quick decision-making. These dynamic visuals enhance budget variance reports, helping stakeholders grasp financial insights effectively.

I'd like to add one more key word - engagement, budgeting is not a finance-only game, so try to engage all the stakeholders as much as possible, from budget setting to comparing the budget differences, all the way along. And there are lots of ways for engagement, inviting relevant department into the budget setting/review/analysis courses, if not feasible, learn these departments' KPIs and try to understand how they operate and what are the financial indication, ask "silly" questions, Finance BPs should have "super power" within the organization, who knows each part of the business, at least financially. ENGAGEMENT, is very important.

I would add the support required to achieve forecast and potential upside where team is working on. This builds transparency among the reviewers and shows agility of team.

There could be two causes for the discrepancy between budgeted and actual numbers. 1) Your budgeted figures are sound, but trends are changing. 2) Your calculations have no foundation, which causes a discrepancy. It is a thorough analysis and to check the accuracy of budget at the following levels: 1) The Budget AC Heads and Sub AC Heads should match the Trial Balance's Expense Category; otherwise, human computations may result in inaccuracies 2) Your Budgeting should be on real terms not carrying baseless assumption values. 3) Without a base calculation for each input and outflow value of budget, your identification process will produce no results

In my experience, utilizing historical data and analyzing trends of actual spending from previous years should help in avoiding or minimizing budget differences within core operations. For new initiatives, budget allocation should be supported with a detailed breakdown of all costs involved in delivering product or service.

In order limit the impact positive of Budget (means ONCOST increase) we must agree or anticipate different indexation mechanism with End Customer so that it can be pass through as transactional pricing