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Your guide to budget vs actuals
Past, present, future
Behold the Sydney Opera House!
It’s one of the most iconic and beautiful edifices in the world, but did you know it was famously over budget and serves as an important lesson in modern financial planning?
Comparing budget vs actual costs is an important process in FP&A (Financial Planning and Analysis) because it allows businesses to track their financial performance against the budgeted plan and make informed decisions about resource allocation and strategic planning.
What is budgeting variance?
Budget variance refers to the difference between the actual financial results of a company and the budgeted or projected results. It is the variance or deviation that occurs when the actual financial performance of a company does not match the expected or budgeted performance.
Budget variance can be calculated for various financial metrics such as revenue, expenses, profits, and cash flow. The analysis of budget variance helps companies to identify the reasons for any discrepancies between actual and budgeted financial results, and make adjustments to their strategies accordingly.
Budget variance can be either positive or negative. A positive budget variance occurs when the actual financial results exceed the budgeted results, while a negative budget variance occurs when the actual results fall short of the budgeted results.
As previously mentioned, the Sydney Opera House is an example of budget variances that informed generations of financial planners (the original budget for the project was estimated to be AUD $7 million, but the final cost ended up being AUD $102 million, a variance of more than 1,300%).
The main reason for the significant budget variance was the complexity of the project. The Sydney Opera House was designed by Danish architect Jørn Utzon, and its unique sail-like design presented numerous engineering challenges that had not been encountered before. This led to numerous delays and unexpected costs, as the construction team had to develop new techniques and materials to complete the project.
Despite the significant budget variance, the Sydney Opera House is now an iconic landmark and a symbol of Australian culture. The lessons learned from the construction of the Opera House have also helped to inform future construction projects and the importance of accurate budgeting and risk management.
What is budget vs actuals analysis?
Budget variance analysis is a key tool in financial planning and analysis (FP&A) because it helps companies to track their financial performance, identify areas of improvement, and make adjustments to their strategies accordingly. The process of budget variance analysis typically involves the following steps:
The mathematical process of performing a budget vs. actual variance analysis involves comparing the actual financial results of a company to its budgeted or expected financial results, and calculating the differences between the two. Here are the steps involved in the process:
Gather the actual financial results: Obtain the actual financial results of the company for the period in question. This may include revenue, expenses, profits, cash flow, and other financial metrics.
Gather the budgeted financial results: Obtain the budgeted financial results for the same period. This may include revenue, expenses, profits, cash flow, and other financial metrics.
Calculate the variance: Calculate the variance or difference between the actual financial results and the budgeted financial results for each financial metric. This is typically done using the following formula: Variance = Actual Value - Budgeted ValueIf the actual value is greater than the budgeted value, the variance is positive. If the actual value is less than the budgeted value, the variance is negative.
Calculate the percentage variance: Calculate the percentage variance by dividing the variance by the budgeted value and multiplying by 100. This is typically done using the following formula: Percentage Variance = (Variance / Budgeted Value) x 100A positive percentage variance indicates that the actual financial results are better than the budgeted financial results, while a negative percentage variance indicates that the actual financial results are worse than the budgeted financial results.
Analyze the results: Analyze the results of the budget vs. actual variance analysis to identify the reasons for the variances and to determine whether corrective action is necessary.
What is the future of BVA?
A lot has changed in the world of FP&A since William the Conquerer asked for the first verified budget known as the Book of Winchester, more commonly known as the Domesday Book, to be drawn up back in 1070.
AI (Artificial Intelligence) has the potential to significantly enhance the budgeting vs actuals process by providing businesses with real-time insights and automated data analysis.
At Firmbase, we’re excited about how technology can help better plan our futures and we’re constantly coming up with ways of streamlining budgeting vs actuals, reducing errors and providing users with the confidence to build their careers and tomorrows.