Budget variances are the difference between a planned budget amount and an actual amount. An analysis of budget variances will reveal the reason behind failures. It helps point out the trends to make your company a success. A budget analysis should be performed at least once every quarter at a minimum and when the market changes due to a crisis like COVID-19, it should be done every week. You need to know the right time to respond to environmental changes and market fluctuations.
A budget variance can be either favorable or unfavorable. A favorable one is an amount in the budget that is good for the business. Simply put, this means that there was more money than what was expected or costs will less than anticipated. A favorable budget variance has a positive impact on the business, while an unfavorable budget variance harms the business. It is important to uncover the reasons why it's good.
A favorable business budget variance should not be looked at quickly and then just dismissed because it is good. It is important to know what is making operations more profitable. This way you can enhance this driving force and keep it up. The causes of unfavorable budget variances can include inaccurate budgeting, changes in the market, customer acquisition, employee fraud, and changes in costs. It may be time to better monitor and revise your business plan. Customer service may need to be ramped up, or you may need to implement a new sales channel.
There may be changes in the market, and increased competition may adversely affect your client acquisition. And unfortunately, employee fraud does occur. This is something that you want to be able to identify, and you want to be able to prevent it. Employee fraud can easily occur with things like expense reports.
There is always an opportunity to improve your budget. Make sure you have written policies in place for this. In addition, you may have increased costs due to price hikes from suppliers. You must attempt to try to negotiate prices with your suppliers. Another strategic move to make is to switch variable costs with fixed costs. This may offset other expenses.
Take a good look at the process of your operations. Is there room for improvement? Perhaps, streamlining the process and making things more efficient will improve your budget variance.
You must know how to ride out the bad times in business. It is also important to know whether or not you're going to meet your goals. An effective way to track budget variance is to implement either a dynamic spreadsheet just for your company or to use dashboards. To calculate a budget variance, you just subtract the amount spent for each line item. To calculate a percentage, simply multiply by 100.
Budget variances are used to improve business operations. It allows you to dig into revenue to find out where you stand. It is also an accurate forecast for the year. It shows you how the company has performed.
Budget variance analysis can create more money. A budget variance is also important for you to prepare the budget for the next year. If you're unsure how to prepare a budget variance, consider purchasing some software to do this for you or consider hiring a financial expert to do it for you.