How much attention should you pay to a budget variance?
A small business owner should take the initial step with financial management to put a budget in place. A budget outlines the plan for managing expenses in the business. A variance is an indication that there is a difference between the actual amount spent and the planned amount.
“The secret to budgeting is that it needs to be honest. Not what you think it should be or wish it could be, but what it really is.” – Lisa Conway – Hughes
There are two types of variances as follows: –
– Favorable budget variance – This indicates that the budget is higher than the actual costs incurred. It could also suggest that revenue was higher than the expectation.
– Unfavorable budget variance indicates that the budget is lower than actual costs, predicting increased or unplanned expenses. It could also mean lower than expected revenue.
A budget variance speaks the language of what is driving operations in your business. Favorable budget variances are not always an advantage. It is essential to determine what could be causing the variance for more accurate planning.
Here are three ways that a budget variance can impact decision-making in your business: –
Identify miscalculations in your budget
Primarily, the budget is a plan. This means that it needs to be consistently reviewed to ensure that it is accurate. Variances indicate that there may be a recurring issue that may affect your operations. It also becomes easier to identify if you have inaccurate data or are making mistakes with your formulas. Finally, the variance will indicate where you need to make changes.
Determine changes in costs or revenue
An unfavorable budget variance indicates a problem with either your business expenses or revenue. It calls for attention to these crucial areas of your business. It is essential to track suppliers and any price hikes they might impose as a small business owner. This will allow you to explore innovative strategies for cost-cutting or negotiate for a better price.
Fraud Identification
This may occur mainly in the expense budget. Over time, it could lead to massive costs for the business. To mitigate risk, pay attention to budget variances. Careful examination will enable you to identify the issue and the wayward employee so you can take appropriate action.
Even though a business budget variance doesn’t provide all the answers, it could help you make significant changes that could trigger your business’ success. Therefore, do not just pay more attention to it; act on it.
Stay on track of your budget, and potential variances, by working with a virtual accounting or bookkeeping professional. Choose RCN CPAs for comprehensive, future-focused financial services and strategic business advisory to guide your decision-making.
