To maintain a healthy business, leaders should regularly assess how their organisation is performing financially. This will help business owners to identify what areas of their operations are doing well or needs improvement.
Ideally, financial planning should aim to be accurate; however, this is rarely the truth!
Let’s dive in to understand the difference between budget vs. actual variance and how we can utilise this data!
What is Budget vs. Actual Variance?
Budget vs. actual variance illustrates how your business performed against your forecasted financial results. Although organisations do their best to predict their cash flow accurately, a lot can happen to a business to alter these results, from economic impact to manual errors.
The variance between projections and actual performance is typically identified as a percentage or currency amount. This analysis can help leaders better understand what regions or product lines are outperforming the others or help to focus on the pressing issues within the organisation.
Although the variance amount itself can be handy data to have, it is also imperative that leaders act on the information that they gather through these inspections. Data will not save your business, but actions will!
What Can You Do with Variance Data?
As with most things in life, the value of the variances lies in the details. Revenue analysis can be broken down into multiple parts and filtered by certain aspects of a business, including different types of products, revenues, customer locations, or sectors. A visual representation of this data can also help you to quickly identify and take advantage of previously unidentified growth opportunities and bring out the max from your cash flow.
It can also help to understand the challenges of your financial predictions and adjust your best practices to make sure that your next projections will be more accurate and reliable. This will reduce risks in your financial planning processes and looks great for your investors when they are flipping through your data.
Not many things are more attractive for an investor than leaders who know their business inside and out. It is easy to get overwhelmed by the mountain of information you have flowing in, but with a seasoned actuarial professional endless data rows can be turned into important business value.
Why Can Variances Happen?
There are many reasons why your previous predictions might not have gone as planned. You might have just started in the business world and have limited exposure to effective accounting techniques, or you may have hired a rookie accountant. More often, however, variances occur due to economic shifts such as changes in market conditions, new competitors, spikes in supplier costs, or unforeseen circumstances.
Don’t be too hard on yourself for not getting it right first, but use the experience to ensure that your consecutive budget estimates will hit the right mark.
Managing your organisation’s budget can be a daunting project that is easy to miscalculate. External financial partners like Sanay can help you to make sense of endless data and ensure that your financial forecasting is accurate.