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You have created your budget, trimmed it down to the essentials and refined its layout and supporting workings. But your budget is a plan, and things don’t always go according as you want them to. Therefore it is important to monitor your activities on a regular basis to see where you are in relation to your targets.
What Are Variances?
The difference between what you had budgeted for and your actual figure is known as a variance. A variance can be a negative or a positive number or percentage. For example, if your staff costs show a variance of 2.5%, this means that you have spent 2.5% more on your staff costs than you had budgeted for. A variance of negative £3,000 on the travel budget would represent an underspend.
Why Are Variances Important?
Underspends are just as important as overspends. Surely underspending means that you are saving money and this will make you look efficient? Yes, it can do, but this is not necessarily the case. If you have come in under budget, you may be leaving out something that was important and not using your money in the best way possible. The point to remember is that your budget was created with certain objectives in mind.
Underspends are just as important as overspends. Appearing to save money can make you seem efficient, but underspending does not necessarily equate to making savings. If you have come in under budget, you may be leaving out something important and not using your money in the best way possible. The point to remember is that your budget was created with certain objectives in mind.
You can also have variances in sales budgets where you either meet or exceed sales targets. Again, tracking and monitoring your sales allows you to make decisions based on your financial performance to date in order to achieve your objectives.
Why is it Important to Review Variances?
Reviewing variances enables you to track the overall effect that certain changes in your plans have had on your financial performance. It also tells you where you are wandering off track. Reviewing variances serves as an early warning mechanism so that there are no huge surprises at the end of the budget period.
Variances not only tell you if there is a problem but also the size of the problem. You need to know the exact size of the problem to be able to identify its implications. You can then decide whether you need to investigate what has happened to cause this and take any remedial actions to get your finances back on track.
You should also consider how you could prevent this sort of thing from happening in the future. However, not all variances are preventable. For example, if a freak storm destroyed your premises, you will have to incur extra costs to get the business back up and running. You could not have planned for the storm. However, you may incur large building repairs if you fail to have adequate insurance coverage. Setting aside enough money in your budget for items such as building insurance will prevent this type of scenario.
What Happens if Your Budget is Unachievable?
Even though your original budget may have been checked and authorized by your senior colleagues, it may not actually have been achievable in reality. It may be that this becomes increasingly evident as things unfold throughout the budget period. If you have demonstrated that you have controlled your team’s activities well and properly tracked and monitored your budget, your senior colleagues are more likely to allow you to make adjustments to your budget so that it is more realistic.
By tracking and monitoring your budget, you can stay in control and demonstrate good management of your activities and their financial impacts.
