Reporting Budget And Forecast To Actuals Easy StepByStep Guide

Let’s recap where you are at in the budgeting process. You have made the budget and you have done a preliminary review to make sure that the actual costs (“Actuals”) are posting to the correct accounts and departments . Now you need to run a full budget variance analysis and see where your company overspent or underspent.

This process goes by manay different names such as the following:

• Budget variance analysis

• Budget variances causes analysis

• Variance report

• Variance analysis

• Modelling actual versus budget

Preparing The Budget Variance Analysis

Most companies will do the budget variance analysis at two levels

• For each major department by high level internal account group and compare actual versus budget

• On a consolidated basis by high level internal account group and compare actual versus budget

Additionally, most companies will have high level internal account groups. For example, total compensation might be a high level internal account group, whereas employer portion of payroll tax expense would be an account that rolls up into total compensation. Generally, this budget variance analysis can be done at the more summary level, unless certain general ledger accounts become part of the explanation.

After the close is done, the next step is to start on budget to actuals and the forecast to actuals on a department by department basis. Different companies place a different level of importance on comparing actuals to the budget vs comparing actuals to the forecast. Often times, department heads earn bonuses based on staying within their budgets for either their departments or on a consolidated company level.

Many times the department heads may not know how they are tracking to their budget, and may need to decide to slow spend or delay projects, if they are running over their budgets. Company culture and the tone set by the CEO and CFO will dictate how important it is for department heads to not go over budget.

Some companies use the budget purely as a tool to predict cash flows and earnings, and don’t let the budget influence whether money gets spent in the future or not. Other companies will stick to the budget very tightly and will prohibit department heads from going over budget. The rest of companies are somewhere in between these two extremes.

Another Analysis that gets done once the close is complete is the consolidated budget to actuals analysis and the consolidated forecast to actuals analysis. In these analyses, the finance/accounting team will compare budget to actual or forecast to actual for the month and for the year to date. Based on the precision desired, the finance/accounting team will detail out variances in major revenue, COGS and expense categories and will obtain explanations from both inside and outside of the finance and accounting team.

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Reporting Forecast To Actual Results (aka Flexible Budget)

Most publicly traded companies, with the enough finance department resources, will also do a forecast each month. The forecast can also go by the name of a flexible budget. The forecast is essentially redoing the budget for the remaining months in the current fiscal year based on feedback from department heads. However, the forecast doesn’t need any board approval. Often times, the CFO or controller will provide an informal approval of the forecast each month.

So, why do companies go through this significant amount of extra work? The reason companies do a forecast, or flexible budget, each month, is that the annual budget becomes stale surprisingly quickly. The company takes on unplanned projects, spending starts trending higher or lower, sales start trending higher or lower, or margins start trending higher or lower.

Starting in January, the finance team perform the actual versus budget analysis described earlier and will identify the budget variances causes. For the month of January, the Budget and the Forecast will often times be the same because not enough time has passed for the budget to become inaccurate or stale. But then, as the finance team works through explaining the variances from January Budget to Actuals, they will also gather additional information from the department heads. The Finance team will ask, “are the underspends or overspends relate to timing or are they permanent variances.” During this process, the individual reaching out to the department head, will also ask open ended questions like, “Are there any other savings or overages that you know about for the remainder of the year?”

Some Common Terms In The Budgeting Or Forecasting Process

Savings means that we budgeted something to cost $20,000, but the actual amount came in at $5,000. This would be a $15,000 savings, and we would not update the forecast for future periods. Savings would indicate a permanent difference and not just a timing difference.

Overage would be the opposite where we spent more than we planned and also indicates a permanent difference.

Timing variances would be when we budgeted to spend $20,000 in the month being analyzed, but the costs will actually hit in a later month. In these cases, the Finance team needs to move the costs in the forecast to the month that they expect the costs to hit. Timing variances can go the other way where actuals hit before the month in which they were budgeted.

Unfavorable means that the actual cost is more than the budgeted or forcasted cost regardless of whether it is timing or permanent.

Favorable means that the actual is less than the budget or forecast regardless of whether it is timing or permanent

Finance Department Staffing

Companies that want to implement a forecasting process are going to need additional staffing on the Finance team. The Finance team is also going to need a significant amount of support at the executive level, as the department heads are going to have more work to do as well when they have to re-update their budgets every month for the forecast or flexible budget. The forecasting process becomes almost unmanageable by using Excel spreadsheets. Generally, the complexity of managing the forecast or flexible budget versions each month along with the difficulty in generating the needed budgeting and forecasting reporting out of Excel or the basic general ledger program, is going to force companies that want to do forecasting to get some type of budgeting software.

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Alternative Forecasting Process

Some companies use the forecasting process as a way to generate pre-close estimated actuals each month. In these processes, starting about three days before the month ends, the Finance team will work with the department heads and the accounting team to update the forecasts before the period closes. Everyone will need to provide preliminary estimates of all major journal entries that they plan on posting. This forecast is provided to the CFO, so that the CFO has more real time data and does not need to wait 5-10 days for the actual numbers. Then, the finance team will compare the actuals to the forecast, and any variances will generally be due to forecasting errors, or errors in the actuals. While this process has its own merits, it is not the norm.

It is up to the management team to decide what budgeting method works best for the company. Some companies will compare the actual results to the budget at a consolidated level, at a department level, or at both levels. Additionally, based on internal resources, many companies will prepare a rolling monthly forecast. The budgeting process is a critical function to any public or non-public company.

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