Do you have a budget – and what relationship was there between the previous year’s budget predictions and last year’s outcome? Drawing up a budget is often the best way of controlling or monitoring costs. You can use your budget to adapt your expenditure patterns as required.
By comparing forecast costs and sales on a month-by-month basis you can:
- Improve your budgeting
- Identify areas of weakness in your business.
A simple form of budgetary control is to compare the actual amount spent on budgeted categories of costs each month with the amount you expected to spend. And then you can find an explanation for any variance from the predicted figures.
The following table provides an example of this.
| Monthly Costs | Total Cost | Rent | Labour | Parts | Telephone | Fuel | Misc |
| Actual | $15,500 | $2,000 | $5,500 | $5,000 | $2,000 | $500 | $500 |
| Budget | $15,750 | $2,000 | $4,500 | $7,000 | $1,000 | $250 | $1,000 |
| Variance | -$250 | $0 | $1,000 | -$2,000 | $1,000 | $250 | -$500 |
Note that if your variance is positive the budget has been overspent, whereas if it is negative, the budget has been underspent. Prepare your own budget for cost comparisons and calculate the variances.
Understanding your variances
The next step is to examine the cost items where the budget has been exceeded and to try and determine the reasons for this outcome.
Often the variance is unpredictable due to unforeseeable events – invoices arriving earlier or later than expected, changes in government charges, inflation, unexpected repairs or perhaps an unpredictable breakdown in some vital equipment.
A negative variance (underspent) is generally a good outcome, provided revenue has not been diminished. If revenue is also down, then your expenditure should also be in line with this result.
So, your variance calculations should be done in terms of dollar variances as well as percentage variances. The latter is the more important.
The important thing is to go through the discipline of checking and finding reasons for any variance. This process will help in a few ways as it will:
produce a more accurate forecast of costs in the future as well as reduce your expenditure on fixed costs.
provide an early warning system should you overspend in any particular area for whatever reason.
help improve your accounting system by pointing out areas where information is too vague, such as sundry costs.
Variance analysis, and the reasoning behind the figures, is an important management tool. Often this information can be used to adapt and change strategies in a relatively short period of time. Make full use of this benchmarking process
