What FP&As Need to Know About Comparing Budget vs Actuals

One thing FP&A professionals learn early in their careers is how to compare actual results to budgeted results. Carrying this process out effectively is vital to the health of the business, its future success, and the ability of an FP&A team to have the impact it deserves – which is also the impact the business needs it to have.

Why You Need to Compare Actual Results to Budgeted Results

No matter how thorough your organization’s budgeting process, and no matter whether you use flexible budgeting, incremental or zero-based budgeting, top-down budgeting or bottom-up budgeting, your planned budget isn’t going to match up perfectly with the reality in the departments across your organization. 

In most cases, this isn’t because there’s something wrong with your budgeting process. (If there is, that’s also something that should be discovered through the BvA process.) It’s usually because we live in a dynamic business environment impacted by many factors beyond our ability to control or, to an extent, predict. Even the best predictive work can only give you a reasonable approximation. When things change – as they will – departments and businesses need to adjust. 

Supply chains may experience disruption. Raw material prices and availability may shift. Key employees may leave. Inflation may impact costs and consumer sentiment. Even weather can have a significant impact. And so on. All these factors and more may result in discrepancy between the numbers in your budget, and the actual data. 

If you’re not actively tracking the variance between budget and actual, you could have huge financial discrepancies billowing out in every direction before you know what’s going on. The comparison is vital so that you can course-correct as needed before an existing direction becomes a liability.

How to Compare Actual Results to Budgeted Results

The core of the BvA process is a straightforward comparison of numbers. Essentially, you want to take the set of numbers each department predicted for the relevant key metrics (what would be spent on various activities, and what results would come from them), take the real-time actual spend and results, and compare actual results to budgeted results. 

There’s also a data trail underlying these numbers; you want to know about not just the results, but also the factors that combine to bring about the results, and whether they were as anticipated as well. This may well include external as well as internal data points. Market factors, price of goods and labor, economic trends and so forth may all play a role. 

The comparisons are often complex and involve huge amounts of data from diverse sources, frequently going many layers down the operational, logistical or commercial processes in place in the organization. It’s not enough to know that your sales and operations teams are close to budget in terms of both spend and results, for example – you need to be clear on whether that accuracy is because everything went as expected, or because of entirely unexpected factors that happened to combine to produce numbers close to expectations. 

Since this process is a very involved one, many FP&A teams nowadays employ a dedicated platform such as Firmbase which is designed to automate the heavy lifting of gathering and comparing data, as well as the base level of analysis. This frees up FP&A time and focus for the important work of deeper analysis, determining strategic implications, and formulating suggestions about what actions should be taken as a result to ensure business success. 

What FP&As Need to Remember When They Compare Actual Results to Budgeted Results

Getting the BvA comparison right is a key component of the FP&A role and its value to the organization. Here are some vital things to remember as part of the process:

• Make sure data comes from the right sources in your organization. Automate the data collection process so that no mistakes can creep in accidentally. 
• Ensure cross-departmental consensus on key terms. For instance, everyone should be agreed on what constitutes a qualified sales lead, or a successfully completed sale.
• Avoid over-reliance on spreadsheets. BvA is an intricate process, and unless your business is very small, it’s likely beyond the capabilities of a spreadsheet to handle. Use a platform such as Firmbase to minimize manual data entry and the mistakes it generates (Firmbase automates up to 80% of your manual FP&A workload), and limit the amount of time required to gather data and perform basic calculations rather than analysis.
• Actively look for connections. A BvA process brings data together from across the company, and that can be a valuable opportunity. For example, as part of a BvA you can work to understand how aspects of pre-transaction impact post-transaction. A salesperson who sets unrealistic expectations for prospects might result in high churn a year later, for example.
• Incorporate non-financial data. Don’t focus solely on the dollars. For instance, if you see a reduction in productivity, is it connected to headcount? Sick days, if it’s been a bad season? Or employee engagement, if there’s an HR survey on that? Weather, if that is a factor that might be relevant in your industry?
• Tell a story, not a list of numbers. It’s not just about whether the budget numbers meet the actual ones. The reasons behind successes and discrepancies in forecasting are important too, because those are what guide the need to either change or hold the course.

Communicate the FP&A Analysis

FP&A professionals typically come from strong finance backgrounds. They reach most naturally for numbers, not words. That’s a powerful ability, but it’s only the beginning of being effective in FP&A. 

If a tree falls in a forest, it might make a sound. But if you make the best and most accurate BvA analysis ever, and don’t communicate it effectively internally, then it has no impact beyond checking a box and creating a paper trail of surface level responsibility. 

FP&A teams need to take their analysis, and use it to drive the necessary actions and, where relevant, changes within their organization.

• Make it collaborative. To get buy-in rather than pushback for both your analysis and your recommendations, make the process collaborative from the start. Everyone needs to know that this is impersonal, and about working together to achieve what’s best for the organization.
• Don’t only talk about data. Your communicative efforts need to be grounded in data, but not just about data. Don’t assume everyone else has your familiarity with numbers, correlation, or causes. Your job is to explain clearly but without condescending.
• Use relevant language. When you are talking to a range of departments and stakeholders, make sure you present to each one reflecting the areas and goals that they care about most. Customize your message, don’t give a set speech.
• Make it clear it’s real-time. It’s key to convey that your analysis is based on current data, to drive home the need to act now to avoid risk or leverage opportunities.
• Think actionable. Come with recommendations about what needs to be done, but be open to suggestions during the process. The key thing is not to implement your specific ideas, but to ensure that steps are taken to bring about the results you identify as being required. 
• Use AI. If you’re trying to do this without AI, you’re making life harder for yourself for no reason, and missing out on opportunities to expand and improve the process. Firmbase’s native AI assistant means you can ask important questions about the data in ordinary language, and get instant, accurate answers. 
• Follow up. To be effective, this process shouldn’t be something you check off your list and forget about. Follow up the steps that were agreed on with the people who took responsibility for them, to compare the evolving budget versus actual results and make changes as necessary.

FP&A teams who compare actual results to budgeted results and use that comparison to make possible a deep understanding of the business’ position, advantages, successes and challenges, can be a huge asset to their organization. This kind of comparison can ensure the business is realistic about its financial situation, can course-correct as needed, and seize opportunities as they arise.