Understanding Budget Variances
What is a budget variance?
As the first quarter wraps up for most companies, it’s a perfect time to perform an in-depth analysis on your budget and all that work you put into building your perfect budget.
Related Read: From our roundtable discussion on budgeting and forecasting for high-growth companies: The essential questions for each stage in building a budget.
Put plainly, budget variances are any difference between an actual amount and a planned or budgeted amount.
The reasons and volatility behind budget variances and why you should pay attention.
Performing a budget variance analysis, helps you understand your business operations and prepare for future budgeting efforts. And of course, if you’re experiencing unfavorable variances you want to determine the source ASAP. Your budget variances could be attributed to a plethora of causes:
- Inaccurate budgeting: If this is a recurring issue you might want to consider revising your budget.
- Changes in the market economy: Make plans to monitor and adjust your business plan to adapt. Maybe you simply missed a sale. Do you need to innovate, find a new platform to market and sell your product on, or improve customer service?
- Client/Customer Acquisition: Related to the market economy, increased competition is one thing that often comes into play which directly affects your client and customer acquisition rates.
- Employee fraud: Unfortunately, this could be one cause of unfavorable variances, and it goes without saying that employee or expense-related fraud is something you want to source and prevent. Put workflows and policies in place to mitigate your risk.
Related read: If your company provides expense reimbursements, then it runs the risk of fraud. Expense report fraud is a touchy, yet important issue to address.
- Changes in costs: This kind of variance might even be expected if suppliers have let you know costs will increase after you’ve set your budget. However, if your costs do increase we’ve seen some of our most innovative clients tackle cost-cutting by going to their existing suppliers and competitors to negotiate a better price.
- Improved operations: Maybe your employee turnover has been at an all-time low, or your team has new, more efficient procedures. Whatever the reason for improved operations they’re as important to note and build on as inefficient operations.
Whether good or bad, the reasons behind a variance are essential to your business operations.
How to monitor and perform budget variance analysis.
The most important thing most business owners want to know is whether they’re going to hit, miss or exceed the budgeted targets. Yet another reason why it’s important to both monitor and explain budget variances. Hands down, our favorite approach to budget variance analysis is to use dashboards or dynamic spreadsheets customized for your company.
A Cloud CFO Tip: Pay attention to sizeable variances in both dollar amounts and percentage. Say you spend $200 in office supplies compared to $100 budgeted- the variance percentage will be 100% off, but who cares? It’s a mere $100. Compared to salaries which may be only 5% off but could mean tens of thousands of dollars over or under budget.
For the full article, visit our blog, How to Monitor and Understand Budget Variances.