Come the end of the fiscal year, financial statements are among the most valuable documents that can be used to review the health and success of a business. As you look through your income statement, cash flow, and balance sheet, a key factor in your review is a Budget Deviation Analysis.
While this process can be complicated for large businesses who often have multiple products or even multiple business units, Budget Deviation Analysis for small business owners is simply the process of comparing what actually happened and what you expected to happen.
But why bother?
Budget Deviation Analysis is the heart of the review process. Not only can it answer why you may not have made as much profit as you expected (or hoped) or met your goals, but it can help identify problem areas in your business that you need to find solutions for. This information is vital to starting off the new year healthy and with a good strategy.
To perform a Budget Deviation Analysis you need two basic things:
- Your business forecast or budget
- Your actual profit and loss (P&L) statement
Your business forecast and your P&L statements should be laid out in more or less the same format. The reason for this is that in order to perform your Budget Deviation Analysis, you will do a side by side comparison of the numbers in these documents. Each of these should lay out, in a monthly format, sales revenue, variable costs, such as those that result directly from sales activities, and fixed costs, such as overhead expenses like rent. The difference is that in your business forecast, the numbers generated are your expected revenue, variable, and fixed costs, while in the P&L statement they are your actual results. The more detailed these are the better, as it will be easier to identify exactly where spending was too high. Expense reports will provide further insight into what purchases were made and by whom, which can be easily tracked with the use of an automated expense management system.
Once you have compared your actual performance with your budgeted forecast, you can tell specifically where in your total operation you need to focus your attention based on the difference between expected and actual outcomes. Areas where you were below or on budget can be set aside for later. These should still be reviewed at some point though, because they tell you what you were doing right – a key part in laying out a strategy for the upcoming year. Areas where expenses exceeded your forecast should be addressed immediately to find the cause. Problem areas in business tend to have a snowball effect, so the sooner you find a solution the better.
With all of this information in hand, you will be able to discover the secrets of running a successful business and create a plan and strategy that works for your business.