If you tend to gaze at past your financial statements without really registering what’s there and what you can learn from them, you may want to pay particular attention to this article, because by adding one vital detail to your financial reports, you can turn these rather dry documents into a recipe for success.
This magical element creates a comparison of your budget to actual results. You’re already setting goals and pursuing them; with a budget versus actual income statement, you’ll discover your progress and determine where changes are needed.
In your budget, you’ve set a future revenue target and spending goals. But it really doesn’t become useful until you determine which objectives you’re achieving and where you fall short. A comparison of your budgeted figures to actual results will tell you whether your business is performing the way you want it to.
While key performance indicators are useful when you need a detailed analysis, small operations need the straight facts at a glance. Income statements comparing budget to actual are pretty simple – proof that useful financial reports need not look like an intricate maze of figures.
As the name suggests, a budget-versus-actual report compares your results for every income and expense category to your budgeted amounts for those categories. The difference is then expressed as a percentage or dollar amount of variance.
These two actually work well together: If, for example, there’s a substantial difference between your budgeted amount and the actual result, you will need to pay attention to it. But if the dollar amount isn’t huge, it may not be alarming.
One way of looking at it is this: If you budget $15 for a domain name but spend $18, the differential is a whopping 20 percent. But since it’s only $3, the differential is not that important. In these cases, you should group small categories into one meaningful account.
Generating this report isn’t complicated. Enter the formulas in a spreadsheet program with your budget figures. Then simply add your income and expenses for the period. The formulas automatically calculate the differences between budget and actual.
Popular accounting programs such as QuickBooks allow you to input budgets; an income statement that compares budget to actual is one of the application’s standard reports.
If your overall business results are not what you expected, a budget versus actual report reveals the trouble spots. Discover what worked when you did achieve your targets, and make those actions work for you to overcome deficiencies. Armed with this knowledge, you can chart a new course.
One surprise you occasionally may find in a budget-versus-actual comparison is a greater than expected revenue accompanied by higher specific expenses. This helps you determine the strategic expense categories where more spending has the greatest impact on revenue growth.
You need to know where you budgeted too little or too much of your limited resources, because if you don’t include budget-versus-actual income reports in your financial statements, you’re playing fast and loose with your company’s future.