Creating a budget and sticking to it can be hard. Many people look at a budget as being restrictive and inflexible. Some may become overwhelmed when an unforeseen expense can arise from nowhere. What you budget for compared to the actual figures can make you just want to give up. However, the budget is necessary to make sure that this does not happen. A budget variance is going to happen. I can help you understand a budget vs actual variance analysis Report.
The actual report will help you understand the budgeted amount by letting you see where you have over and underspent. Your budget vs the actual amount spent is where you gain wins and losses, just like a business looks at line items to determine actual revenue. Everyone should view their expenses as adding or taking away from their net income which is their actual income. The budget variance analysis can shed light on where you need to reign in expenses and where you can spend more. You can also use any extra funds to save or cover other expenses. This is how the actual analysis can help you.
Actual Analysis
Once you have created your budget you are going to want to see how you are doing with each expense. In most cases, you are going to want to avoid a negative variance. A negative variance is the percentage under what you have budgeted to spend. For example, groceries for this week are budgeted to be $100. Say, you spent $150.00.
The negative variance would be ($100-$150)/100 =-0.5, or 50% over budget. This translates to a negative $50. However, if you were to spend $75 instead of the budgeted $100 the variance would be positive variance and a good thing. For example, ($100-$75)/100 = .25 or 25% under budget. You saved $25. Hence, actual expenses do matter when you are living on a tight budget. Any coins saved can be redistributed or saved.
For first-time budgeters, it is very important to understand the actual analysis of your spending. The best practice would be to review your spending for a year. Adjust your spending going forward reviewing the actual numbers for each month. This is where you will find your spending trends to adjust your cash flow statement to avoid an unfavorable variance on any of your expenses.
Cash Flow Statement
When we first purchased our home money was tight. There were many unexpected expenses I was not budgeted to take care of. I needed actual results to prepare for future expenses. Hence, I created a cash flow statement in an Excel spreadsheet to help me manage our funds. I start with a basic budget, and then I create a cash flow statement for the entire year.
This helped us budget for escrow increases, heating, and electricity bills that tend to vary by month. It also helped me budget for seasonal items like back-to-school expenses and holiday expenses. Actual comparison is key to creating a cash flow statement. I don’t work with a balance sheet, but my cash flow statement is a product of my static budget.
Static Budget
A Static budget is there to guide you, but you have to work with actuals. Budgeting is not a one-and-done but should be reviewed monthly and yearly to determine if you are on a budget. Being on a budget means that you can afford the things that you have decided to buy in advance. The first step is determining what you are going to buy. You are going to buy food, pay utilities, pay your car note, pay your rent or mortgage, and pay yourself. Once these items are covered you are going to budget for other financial transactions such as credit cards, student loans, and other expenses.
Within your static budget, there are going to be variances within your budget for variable expenses such as utilities or food. There are set budgets for rent, mortgage, car note, etc. These are items that should never have any variances. The variance should be zero. The only time rent changes is an increase when you renew your lease. For mortgages, primarily they only change during the escrow process. This could be changing due to an increase in property taxes or home insurance premiums. However, once these expenses change, they may typically change once a year. Hence, they become static expenses once more. The Static budget is the beginning of your financial planning.
Financial Planning
As a family or a single person, you should sit down as your finance team. You should pull together your financial statements and review your actual performance. Financial planning is the smartest thing you can do to build wealth. The key performance indicators will be your ability to reduce or eliminate debt, save, and invest. It starts with a budget and understanding how you spend money and how you plan to spend your money. You should be able to tell your money how you want to spend your money. It starts with a budget, which is your financial plan. Then you should compare your budget with the actual variance analysis Report.
Budget vs Actual Variance Analysis Report Recap
You should run your household budget as if you are running a business budget. Even though you don’t have a sales team generating revenue you do have an income. Your income is your main source of revenue, and it needs to be managed efficiently. Businesses use balance sheets to create the company’s budget. Therefore, you must use your budget vs actual variance analysis report to create your financial plan. As the finance department monitors the business performance, you too must monitor your financial performance as well to achieve your financial goals.
Using a business as your financial model is a great way to help you manage your funds. You should take your personal finances seriously and use every valuable tool to increase your financial literacy. Here are some tools to help you get started with creating a budget. Check out these best budget apps recommended by Forbes. If you prefer, to create a paper budget click here. Here is the link to create your budget in a spreadsheet using Google Docs.
Budget vs Actual Variance Analysis Report Tips
- Get your paystubs and expenses.
- Create a budget.
- Track differences between budget and actual numbers.
- Review variance for potential savings or to reduce spending.
- Create a cash flow statement to track future expenses.
- Create a financial plan to eliminate debt, save, and invest.
The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty. Proverbs 21:5 ESV
This content is for information purposes only. It does not constitute financial advice. If you need personal advice, please consult a financial advisor. I do not endorse any of the companies mentioned. Please research and do your due diligence. I do not get paid if you click any of the links.