How Do You Do a Budget Analysis?
Make a budget analysis by calculating variances, determining if the variances are favorable or unfavorable and then analyzing the variances. These steps help organizations better understand their financial positions.
- Calculate variances between actual and expected
First, find the difference between actual and expected items. These items can include financial metrics, such as sales. Simply subtract the actual amount from the expected amount to find the difference. Any material differences need to be noted.
- Determine if the budget variances are favorable or unfavorable
Observe Each specific variance to determine if it is favorable or unfavorable. A favorable budget variance signifies a better-than-expected outcome. An unfavorable variance indicates the end result was not as anticipated. For example, sales data greater than initial projections is a favorable variance. Costs incurred higher than originally expected indicate an unfavorable spending variance.
- Analyze the calculated variances and take the appropriate action
After you or your team calculates the variances, it is important to determine their cause so that a plan of action can go into place to eliminate future variances. For instance, typical causes for variances include changes in price, lower-than-expected production yields and labor inefficiencies. Ultimately, the variances calculated need to be broken down into these numerous components.