How to Optimize Resource Allocation Through Budget Variance Analysis

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    Budget variance analysis is a high-priority evaluation that tells you whether you meet your budget expectations. It helps you uncover detrimental overspending, underspending, and other poor resource allocations that negatively impact your performance.

    The result? Swift corrective action, optimized resource allocation, improved financial planning, and more accurate budget forecasting. 

    In this guide, we’ll help you optimize resource allocation by walking you through how to conduct budget variance analysis. Let’s get into it.

    What is budget variance analysis?

    In a nutshell, budget variance analysis is the process of comparing your actual performance (i.e., expenses and revenues) against your estimated budget values within a given period. 

    Finance leaders use this comparison to identify whether the budget variance is favorable or unfavorable and to identify anomalies. The goal is then to identify the root cause of the variance and implement corrective actions to optimize budget resources.

    A favorable or positive variance occurs when your performance exceeds your expectations. For example, if you’ve spent less than you estimated or accrued more revenue than budgeted.

    An unfavorable or negative variance occurs when your actual results are worse than your estimated expectations. In other words, you’ve exceeded your budget or didn’t meet your sales targets.

    Calculating your budget variance is fairly simple. But, analyzing the variances is a little more complex. So, what are the benefits?

    How can budget variance analysis optimize resource allocation?

    By giving you more visibility into your financial performance, budget variance analysis can help you optimize resource allocation in the following ways. 

    Pinpoints areas of overspending

    Spending too much money on the wrong things can harmdestroy your business. Budget variance analysis prevents this by helping you identify areas draining your resources without contributing to revenue. 

    Let’s say that you exceed your cloud budget (something 94% of businesses admit to doing) because of idle or over-provisioned resources. By identifying and addressing your overspending, you can take corrective actions to optimize your resources and budget, such as unsubscribing to idle resources or training staff to use these resources more effectively.

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    Uncovers underutilized resources

    Underspending can be just as harmful as overspending. If you don’t allocate enough resources toward high-performing areas, you risk missing out on lucrative opportunities. And, in turn, you risk wasting resources on low-performing initiatives.

    Budget variance analysis can spotlight underutilized resources. For example, maybe a high-performing marketing campaign isn’t receiving enough investment, or powerful software isn’t being used to its full potential. Use these insights to optimize budgets for these resources and, in turn, maximize their positive impact on your initiatives. 

    Improves budget forecasting

    Budget variance analysis provides the financial insights needed to forecast accurately. By comparing your actual expenses to your estimated budget, you can identify discrepancies that indicate you may need to increase or lower your budget estimates. 

    Plus, you can establish to-the-dollar budget projections for some of your stable activities, allowing you to forecast budgets confidently.

    Promotes strategic decision-making

    Financial leaders can use insights from budget variance analysis to determine financial health and guide strategic business decisions. With data-backed insight into what is and isn’t working, they can validate budgets, take corrective actions, and enhance future short and long-term planning.

    Steps in conducting budget variance analysis

    Budget variance analysis can be time-consuming and complex if you’re new to the process. Luckily, it can be consolidated into the five simple steps below.

    Define clear and achievable financial targets

    First, define and communicate clear financial targets. Ideally, determine how much you’d like to spend and how much revenue you expect to accrue. Use historical data to make these figures realistic and achievable.

    Here, you should also define a time frame for your analysis, such as monthly, quarterly, or annually. Then, leverage planning and strategy tools to help facilitate communication and updates to ensure that your targets remain clear and at the forefront. 

    Collect accurate and timely financial data

    A successful budget variance analysis relies on accurate data. So, gather all of your financial data for your given period.

    Your financial documents should provide you with the data you need. Collect your financial statements, forecasts, invoices, receipts, balance sheets, sales reports, payroll records, and other key documents.

    This is an effortless task if you use accounting and bookkeeping software. It automatically stores this financial data and aggregates it into a centralized location for easy access and analysis. Plus, you get real-time insights into your company’s finances.

    Calculate the difference between actual and budgeted amounts

    You can use dollar or percentage variance formulas to calculate the difference between actual and budgeted figures.

    The dollar variance formula looks like this: 

    Dollar variance = actual amount – forecast amount

    The percent variance formula looks like this:

    Percent variance = [(actual amount / forecast amount) – 1] x 100%

    Again, if you have accounting software, this is much easier. The best bookkeeping software can generate account variance reports for you — complete with visualizations — which makes comparing budgets with actual figures quicker. 

    You can also use a spreadsheet. Enter your budgeted figures in one column, and your actual figures in another, and use the formulas above to get the variance.

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    Investigate the root causes behind the variances

    Now, it’s time to determine the type of variance (favorable or unfavorable) and investigate the root cause.

    If you have a favorable variance, your actual revenue is higher than estimated, or your costs are lower than expected. 

    But why? 

    Which activity boosted your revenue? In what area did you save money, and how? Finding the answers to these questions can help verify your success and introduce long-term improvements. 

    An unfavorable variance should always be investigated, especially if it’s significant. So, determine what caused the variance. Was it down to a decrease in sales volumes? Did you overspend on inventory, labor, or office supplies? Whatever the case, get to the bottom of it.

    Take corrective action based on your analysis

    Use what you’ve learned to drive improvements.

    For example, suppose your negative budget variance was down to plummeting sales. In that case, you might allocate more resources to sales and marketing to enable them to implement better strategies like lead scoring, data analysis, or relationship selling.

    If you overspent on office supplies, restricting their usage or negotiating better deals with suppliers might be the way to go. On top of this, take advantage of automated resource management tools, as they’ll help to improve efficiency without necessarily having to cut back.

    Best practices for budget variance analysis

    How can you streamline the process while extracting the most value from your analysis? Here are some best practices.

    Conduct variance analysis on a regular basis

    Budget variance analysis isn’t a one-time exercise. It should be performed as regularly as possible, ideally monthly or quarterly. 

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    When you stay on top of budget variance, you reduce the risk of financial inefficiencies creeping by unnoticed. Instead, you can quickly spot them before they cause significant damage.

    Establish acceptable variance thresholds

    Some degree of variance is not just expected — it’s completely normal. We’re not clairvoyants, after all. 

    But how much variance is acceptable? And at what point does it become significant enough to warrant a full investigation?

    An acceptable variance threshold describes what you deem to be an admissible deviation from the budget. This will depend on various factors: your company goals, maturity, size, and budget complexity, for example: 

    Medium and small businesses often have stricter budgets and can’t afford to be as flexible with their budget as larger operations. Although the industry standard is usually around ±10%, smaller businesses may decide to be more cautious, limiting their budget variance to around ±5%.

    Large businesses, on the other hand, tend to have more resources and can therefore absorb larger budget variances compared to SMEs. 

    Finally, enterprises usually have multiple financial management systems in place and teams dedicated to managing their budgets effectively. This means they may aim for tighter budget variance of ±3%, as they are able to closely manage and control their resources and monitor performance.

    Ultimately, the key is to assess the entirety of your business and the resources available to you.

    Involve key stakeholders in the process

    Stakeholders—particularly department heads and project/operational managers—tend to have deep, ground-floor insight into resource allocation and performance. As a result, they’re invaluable in trying to understand the different factors that influence variance daily. 

    With their help, you can uncover the insights needed to understand what causes variances and pinpoint areas for improvement. 

    Utilize visualization tools to clearly present findings 

    ClicData’s data visualization feature lets you compile your financial data into pixel-perfect PDF reports. These fully customizable reports can support a range of data visualizations — images, graphs, charts, and sub-tables —- to help you make the most of your data.

    Thanks to data visualization, financial experts can glean insights at a glance — no more trawling through masses of text. And, it makes communicating financial insights to stakeholders much less time-consuming, as visualized data is much easier to understand and absorb.

    Leverage technology for automation and analysis

    Automate some of your budget variance processes with accounting software and data analytics platforms.

    First, ditch laborious, manual spreadsheets and adopt accounting for professional services. Accounting software collects financial data from every corner of your business. It eliminates manual data entry, reducing the risk of your actual and budgeted figures being inaccurate due to human error. 

    You can streamline workflows, uncover and resolve critical inefficiencies faster, and seize opportunities before your competition.

    Data management and analytics tools are another asset. They come with various features that support your budget variance analysis, such as data cleaning and processing, data streaming, real-time data visualization dashboards, and more. 

    Using these tools, you can monitor cash flows against budgets accurately and in real-time.

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    Get started with budget variance analysis

    Budget variance analysis does more to tell you how your money is being spent. It prevents financial disasters, improves financial planning, and unlocks critical information that you can use to optimize resources and drive maximum impact from investments. 

    Are you ready to get started? With the right technologies for automation and analysis, you can streamline the process and get your insights faster.