I am old enough to remember my parents using physical maps to get from one place to the next. When I started driving for myself, it was all about MapQuest. You would put in your current location, select your destination, and it gave you step-by-step instructions to get there. It even told you approximately how long it would take.
Those directions were way better than finding where you are on a map and writing your own. Knowing how long it might take was a huge change but MapQuest was still leaps and bounds from what we have today with apps like WAZE. MapQuest couldn’t always predict construction and detours. It definitely wasn’t able to identify and adjust for traffic accidents. If you ran into construction or traffic, you just had to wait it out. If you left the path you would have to find a map, ask for directions, or stay really close to the original location to be able to get back on track.
What does this have to do with business finance? Do you ever feel like:
- You set an amazing goal for your business. It’s SMART (simple, measurable, achievable, realistic, and timely). It’s a little bit scary. It’s inspiring.
- You mapped out the steps to get to your goal. You know what action you need to take. You have your directions in hand.
- You hit a few bumps in the road, got stuck in a few places, and didn’t actually make it to your goal at the end of the year.
You were working with MapQuest directions and you need real-time updates like WAZE.
Variance Analysis is WAZE For Your Business
Periodic reviews of your budget compared to your actual results is your WAZE. A budget-to-actual analysis is the alert telling you there is traffic ahead; you’ve spent too long here…something is “off”.
The variance analysis, is how you figure out what’s off. When your budget was $10,000 this month for inventory but your actuals say you spent $15,500…why? Did you sell more? Did you have to pay more for certain items? Was there an “accident” that caused a loss of product or damaged product that had to be replaced? Is there an issue with the accuracy of your data? Are the numbers off because the budget was unrealistic?
Know When to Detour
A good budget-to-actual review with variance analysis gets you more time and money because it gets you to the goal.
The difference between setting a goal and getting there isn’t just the steps you plan to take but the detours and opportunities you create along the way.
At the beginning of this journey, most of my clients are still learning how their actions and numbers influence each other. I guarantee there will be variances. You want there to be variances. The variances are how you learn what works and what doesn’t.
A variance doesn’t have to be a bad thing. Sometimes the variance indicates you made more money than you expected. You deserve to know how and why. You deserve to be able to learn from and replicate that process so you can keep making more money! If it was a fluke, you want to know that too. You need to know how to treat that information in your future forecasts.
Create Your Own Variance Analysis
Calculate and Compare
Logistically, monitoring the success of your actual results against your budget is simple. My ten year-old can do the math. The magic isn’t in the math, it’s in the review/analysis. Let’s calculate the variances so we can get to the fun part.
Budget – Actuals = Variance
You need to calculate this variance line by line at the same level of detail you used to create your budget.
Identify the differences that matter to you (I recommend using a specific $ amount and %). For every variance you deem significant, ask WHY the budget and actuals are different? Enlist the whole team. Ask yourself, your staff, your accountant, etc. Similar to the exercise I describe in the revenue and expense drivers blog, you want to dig as deep as you can into each item. Keep asking why until you have detailed actionable results.
Now take action!
Knowing why the numbers are different in the current period won’t get you the results you want next period. You have to use this information to make changes that keep you on track or adjust your goal to reflect your current actions.
How often you check-in on your business is up to you. You’re not going to put the grocery store down the street into WAZE just to pick-up your curbside order. You probably would put a commute to a new building downtown for a 9:00am appointment into WAZE (or something similar). What’s the difference? Distance and time. The bigger the goal, the longer the distance, the more often you should check on it. The more sensitive the goal is to time (due date or the accumulation of variances over time), the more often you should check on it.
I also want to add, the size of your company itself is going to impact how often you want to look at this. A solopreneur is going to be more acutely aware of the things going on in their business because they’re the one doing them. As you grow your business, you have to rely on others to do their job. The results of that can and will show up in your financial numbers.
If you’re ready for some help, I want to be part of your team! I mean it! You can use the information here and in my other blogs to create your own budget, monitor/assess the differences, and work towards your goals. I want you to know how to do-it-yourself if that’s the path you choose to take. Every business deserves to grow sustainable profits through good finances. The truth is, that takes time. It takes time to figure out and implement. I don’t know a single business owner that has more time than they need right now…
One of the benefits to putting your numbers to work for you with professional help is taking back the time your business needs to really grow. Get out of the DIY weeds and focus on the things only YOU can do.