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Budget vs. Actual Analysis

The budget versus actual statement is a crucial measuring device for the Financial Planning and Analysis (FP&A) team. The best-run teams create these reports monthly (and quarterly/annually), comparing actual vs. the budget and against any updated forecasts. The budget vs. actual report should also include the metric drivers of the business in addition to the income statement and balance sheet.

Creation

While straightforward to create, the underlying analysis requires planning, effort and diligence. Each account should be evaluated to understand the variance on both a dollar and a percentage variance. The FP&A team sets raw variance and percentage thresholds to ensure they only investigate significant issues.

When Under Budget

Whether an account is over or under its budget, the root cause must be identified. Underspending in specific departments can be caused by timing or can be a leading indicator of significant issues. If the marketing team spends less than its budget, and that budget drives the number of leads delivered to the sales team, then the business may have sales issues in the next few months. Identifying the root cause enables the business to correct and remedy the situation early.

Early identification of underspending also enables the business to reallocate resources. If the Marketing team can deliver the leads required on a lower budget, those funds can be redistributed to the development team to hire the next developer ahead of schedule. Early identification of variances and communication among the team drives the most capital-efficient businesses.

When Over Budget

The earlier an overspending variance is identified, the more time the company has to adjust future spending to ensure sufficient runway. The company can also identify what enabled the overspend to happen and correct that process. If the overspending cannot be corrected within the period, early communication and showing the impact on future forecasts creates a culture of openness and trust between the company and investors.

When adequately instituted, the budget vs. actual report is the result of an overall process to proactively understand the business, measure the results, and adjust plans as needed to achieve the company goals.

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