Last week the focus was on Key Performance Indicators (KPIs) as an early tracking and measurement tool to improve the likelihood of success in performing to the 2025 forecast. This week the discussion will focus on budget to actual reporting.
Whether measuring KPIs, weekly cash flow, or monthly financial performance, the use of budget to actual reporting is key to success. Many times companies do not report budget to actual results – instead the company reports actual results. This could occur because the people who are preparing the reporting do not want to report variances as the preparer views variances as a mistake in planning that they made. It is imperative that management believes, and instills in their entire team, that reported variances are not failures. Reported variances are opportunities to improve the planning and forecasting, or opportunities to quickly impact performance.
For KPIs, budget to actual is the first and fastest indicator that something in the company’s performance is not going according to plan. For example, if hours worked are below plan, is that indicative of staffing shortages, supply shortages, or unexpected shutdowns? Or, if production is below plan, is that indicative of material supply issues, staffing issues, or plant production and down time issues? Having this information available as close to when the variance occurs as possible provides management with the best opportunity to fix the problem or adapt the business plan.
For weekly cash flow, budget to actual reporting on a weekly and cumulative basis is key to identifying the reason for cash flow problems and creating the ability to impact future cash flow positively.
It is easy to use the excuse of “timing” when explaining variances to plan. Timing is not an acceptable explanation for variances to plan. Rather than using the explanation of timing, could it be that an invoice expected to be collected in week 1 was collected in week 2 because there were shipping delays? Explain what drove the timing difference to enable users to determine if assumptions need to be changed. Perhaps shipping occurs more days after project completion that initially forecast. Or perhaps, more planning needs to be encouraged between logistics departments at the company and its customer. Variances to plans are not failures, they are opportunities to know the company better and to develop solutions to the variances.
Even when budget to actual reporting for the cash flow is in place, it is important to have an anchor cash flow – one that changes rarely and if it changes, it changes on an established frequency. In one situation a company produced a new weekly cash flow each week on Wednesday and then prepared a one week budget to actual reporting for that week on Friday – two days later. There was no value to weekly budget to actual reporting because there was not a weekly cash flow anchor to provide weekly and cumulative testing of cash inflows and outflows to plan, and the testing was literally two days after the budget was prepared.
For monthly financial statements, preparing budget to actual reporting for the current month and year to date provides an opportunity for the management team to assess the likelihood of 2025 performance to plan. This can provide early indications of issues that will arise with profitability and balance sheet management.
As with weekly cash flow tools, it is important to have an anchor plan, which in the example of monthly financial reporting, the anchor would be the 2025 forecast. The forecast should only be changed if all parties agree and understand there will still be reporting to the anchor plan. Reporting to the revised plan is also important and useful.
If management uses these budget to actual reporting tools, they will have an earlier indicator of problems or opportunities and have a better chance of reacting in a way that will improve performance. While there is the temptation to view variances to plan as a negative, viewing variances to plan as an opportunity to become smarter about the future prospects of the business and adapt performance in real time will result in better business performance outcomes.
If you would like to discuss how to maximize the impact of budget to actual tracking into your 2025 plans, or how to develop recovery plans if performance falters, please reach out to Focus Management Group via email or cell. Our contact information is below, and we welcome discussions.
Juanita Schwartzkopf
Sr Managing Director, email j.schwartzkopf@focusmg.com | cell (520) 203.2926
Joe Karel
Managing Director, email j.karel@focusmg.com | cell (312) 307.1541