With a busy business and not much time to really dive into financials or create a well thought out budget, it’s important you know which reports produce the most value and which provide you with the most insight in the least amount of time.
We’d argue budget vs actuals are the set of reports that deliver this value. When your budget and actuals are closely aligned and working together, you are closer to reaching your goals.
What Is the Connection Between Budgets, Actuals, and Goals?
Your goals are a depiction of where you hope your business will go. These goals should be SMART (Specific, Measurable, Attainable, Realistic, Timebound).
Your budget is an assumption of where you expect to spend your money over a given timeframe. Your SMART goals, industry benchmarks, and first-party company data show you where you’ll need to spend the money and how much to achieve those goals.
Your actuals are your current financials. You have certain expenses that stay more or less the same. For example, as an entrepreneur, you may invest in email outreach software. You know how much it costs every month and can budget precisely for it. Your utility bills also stay roughly the same.
For other expenses, the budget may not stay so steady. Supply chain issues may raise the cost of raw materials. You may find your advertising budget didn’t deliver adequate leads to meet revenue goals, so you have to spend more than you planned. These variances happen.
The better you understand them, the more accurate your budget becomes each year.
All three (goals, budget, actuals) can work together to improve your business. And because your budget is created with your goals in mind, comparing your actuals to your budget will tell you how close (or far) you are from reaching your goals.
Analyze the variance to answer important questions like:
- Am I spending in areas that are increasing revenues?
- Could I perform better in certain areas if I allocated more money to a certain expense?
- Are there areas where I can cut expenses to increase profits?
- Do I have enough capital to run this business or need to seek funding?
What does a Budget vs Actuals variance look like? It may take on many forms and could be positive or negative:
- More sales than expected (good)
- Higher profits (great)
- Missed goals or KPIs (room for improvement)
- Higher expenses than budgeted (you can do better)
It’s important to note that just because variance is positive doesn’t mean you should fail to take a closer look at it. A variance that goes significantly in your favor could suggest you’ve got greater growth potential than you’re giving yourself credit for.
Your Budget Was (or Should’ve Been) Created with Your Goals in Mind
When you do this, your budget leads to more success.
You’ll have:
- The ability to allocate your money more intentionally
- Write down your goals and prioritize them. Make sure you’re aligning spending with those priorities. That doesn’t necessarily mean allocating more to your top priority but ensuring you’re spending the right amount to meet that goal.
- A point of reference before making big decisions
- Entrepreneurs are famous for their gut decisions. But when it comes down to it, having the data to back up those decisions helps you pursue opportunities with great confidence and a willingness to follow through with an adequate budget to make that happen. Stakeholders appreciate solid reasoning for decision-making.
- Confidence in the ability to reach your goals
- Sometimes it takes a little longer than expected to reach a goal, or early indicators suggest you’re not on the right track. During these times, knowing that decisions are based on financial data helps you both see it through and confidently make adjustments along the way.
Your Budget vs Actual Report Gets You Closer to Reaching Your Goals
Your actuals tell you what is going on within your business. They include both what you spend and how much income you generated. The better aligned these are, the greater cash flow you have to work with year over year.
Greater cash flow can do wonders for a business:
- Settle debt early
- Freeing up more cash
- Return money to shareholders
- Generating greater confidence in your company and desire to invest in you
- Build a buffer against unexpected challenges
- Greater flexibility to shift resources
- Lower how much you pay for things
- Lower per-unit prices by increasing production, paying in cash, always paying on time, etc.
On the other hand, when actuals don’t match your budget, it means there are improvements to be made. Generally, these require an adjustment in either:
- Your spending habits
- How much, where, when, as well as how you track and stay on top of that spending
- Your budget
- How you allocate money in your budget to meet your goals
These adjustments help to align your actuals and budget to get you closer to reaching your goals. Regularly checking your budget vs actuals report will help you make the needed changes as time goes on and gives you the chance to look over your goals to see if you are on track.
You can then develop a plan for success by asking:
- Where are you now?
- Where do you want to go?
- What’s the gap (budget variance) you must overcome?
Now, create a plan to address that variance. Track and measure your results.
Consider Working with an Accounting Partner
Aligning your budget with your goals can be tedious, and even when that is mastered, there is still plenty of work that needs to be done to help ensure your actuals are hitting the requirements of your budget. But doing so can deliver significant rewards like increased cash flow, shareholder confidence, and growth.When you work with a trusted accounting partner, they’ll make sure everything is in line and working together the way it should be to see success. If you’re struggling to align your budget with actuals, consider Argento.