Budget vs Actual Report: Check Reality and Expectations

A budget vs. actual report is a financial statement that helps founders and management assess financial performance by comparing the company’s actual results with the expectations. 

However, the report is more than simply a comparison, and it enables quick decisions as it reveals where you are reaching your budgeted ambitions and where you have delays or gaps.

Knowing what’s working and what isn’t can make improving your sales and reducing costs easier. A robust and transparent budget vs. actual report will show you exactly where you stand. 

Understanding Budgets and Financial Reports

Budgeting and financial reporting are essential steering tools for many organizations. A budget is a strategy for the future that helps you plan financial milestones to where you want to be. It also provides a framework for measuring performance against expectations so that you can decide when to make adjustments.

Financial statements show your company’s financial performance, usually annually, quarterly, or monthly, depending on your size. They show how much revenue you generated, the cost to generate that revenue, and how much profit (or loss) you made. 

By tracking performance against your budget, you’ll quickly:

1. Identify Financial Deviations
2. Evaluate Efficiency and Effectiveness
3. Enhance Decision-making
4. Foster Accountability and Transparency

In short: understanding financial statements will help you make better decisions about your business’s finances.

Central Components of a Budget vs. Actual Report

An informative budget vs. actual report includes:

• Revenue: How much did you expect during the period, and what did you generate? It might also include an overview of sales, income, or other revenue sources and highlight variations.
• Cost of Goods Sold (COGS): This part is especially relevant for businesses producing or selling physical goods. The report may compare the budgeted COGS with the actual COGS, including material, machine time, and labor costs.
• Expenses: Comparing the budgeted expenditures with the costs incurred can provide insights ranging from overspending to under-allocating on critical components. This section might cover various cost categories, including salaries, utilities, supplies, and marketing expenses.
• Profit/Loss: At the end of the day, this may be one of the most critical indicators of a healthy business: are you generating your targeted returns? Here are helpful ratios, like growth vs. the previous year, operating margin, and other financial metrics.
• Non-Financial Key Performance Indicators (KPIs): Although financial indicators are essential, many non-financial components like churn, retention, and click-through-rate can be leading indicators of the organization’s economic success.

There are several methods for comparing budgeted and actual figures. 

The most common one is a simple variance analysis using subtraction to highlight how each item’s actual performance stacks up against the budget. This comparison can be a single column of figures (the variance) or using a variance-analysis table, which lists all items in order of importance and the gap vs. the expectation.

How can you quickly report and analyze variances? Here are a few examples:

Revenue

Report: Quarterly revenue of $450,000 exceeded the budget by $50,000 (12.5% favorable variance).

Analysis: Identify the main factors contributing to the positive variance, such as higher sales volume, increased pricing, or successful marketing campaigns. Assess whether the gap is sustainable and how to replicate it in future periods.

Expenses:

Report: Monthly operating expenses of $80,000 exceeded budgeted expectations by $10,000 (14% unfavorable variance). 

Analysis: Investigate the reasons for the negative variance. Were there unexpected cost increases, inefficient resource allocation, or overspending in specific expense categories? 

After investigating, identify and implement corrective measures, such as cost-cutting initiatives or process improvements, to mitigate the variance in subsequent periods.

Profit/Loss:

Report: The company earned $200,000 in profit instead of $250,000 as budgeted (20% unfavorable variance).

Analysis: Determine the drivers of the negative variance, including lower revenue, higher expenses, or unanticipated costs. Also, evaluate the impact of external factors like market conditions or changes in industry regulations. 

Develop strategies to improve profitability, such as revenue growth initiatives, cost reduction measures, or efficiency improvements.

Key Performance Indicator (KPI):

Report: Gross profit margin was 45%, lower than the budgeted 50% (5% unfavorable variance).

Analysis: Identify the factors influencing the lower margin, such as increased production costs, pricing pressures, or changes in product mix. 

Assess the impact on overall profitability and consider actions like renegotiating supplier contracts, optimizing production processes, or updating pricing strategies to improve the margin in future periods.

Identifying Discrepancies and Opportunities

A budget vs. actual report can help identify discrepancies between planned and actual spending and opportunities for cost savings. It can also help you understand where to improve your budgeting skills.

The goal is to identify opportunities for improvement and make adjustments for the next period. 

Below are some tips for using the report:

• Identify Discrepancies: Whether from changing market conditions, unexpected expenses, or resource issues, these can help you discover where things went wrong.
• Pinpoint Opportunities: Perhaps the most valuable aspect of the budget vs. actual report is using it to identify areas where you can improve performance and increase profits. For example, steadily growing sales may indicate plenty of potential for growth in that area. Or, if you and your team are handily meeting your expense targets, consider spending less to increase your margins.

Communicating Results and Taking Action

Communicating results is critical for sharing information with stakeholders and team members. Clear and concise communication can help you avoid mixed signals:

• Describe the main points of the report
• Summarize each section
• Explain any issues or concerns with the results

Your employees must understand their contribution to company performance before they can take action. 

With the proper techniques, you can present the report in a way that’s easy to understand:

• Use simple language and avoid jargon. If you must use technical terms, explain them in plain language first.
• Use graphs, tables, and other visual aids to help people understand what is happening with spending.
• Provide recommendations for how to improve performance in the future based on trends from previous years.

Common Challenges and Best Practices

Creating and using a budget vs. actual report effectively can be challenging. There are many standard roadblocks that businesses face when creating and using this report, including:

• Lack of visibility into the data
• Difficulty in comparing multiple periods at once
• Problems identifying trends in spending patterns

Budgets are most valuable when used as tools for ongoing financial management and guiding improvements. 

Reach Out to Founder’s for Help with Your Budget vs. Actual Report

You can learn a lot from budget vs. actual reports, and they are essential tools for communicating results and identifying gaps and opportunities. But starting from scratch can be challenging, even for seasoned executives. 

Clear budget targets and accurate financials will help you use this reporting tool to manage your business successfully. With help from the experts at Founder’s CPA, gaining valuable insights from your financial figures can be a simple task—contact Founder’s today to get started.