Many of us start the New Year with big goals and lofty expectations. By the time we get to the dog days of summer, though, a lot of those goals have been forgotten and you may not remember what you were hoping to accomplish! Life gets in the way, right? But what if you took five minutes each month to sit down and compare your results against those big goals? In this week’s post, we’re going to talk about the Budget vs Actual Report and how you can use it for minor course corrections all year long if you want to hit those profit goals you’ve been dreaming of. Ready? Here we go!
Previously (4 Financial Reports You Need to Crush Your Goals), we discussed how important it is that you use financial reports as a roadmap for your business. The Budget vs Actuals report shows you how well you are meeting your original goals for the year for top-line sales and line-by-line expenses. For each line, you can compare your budgeted amounts against your actual income and expenses. The Budget vs Actuals Report is your reality check for how close you are to your goals for the year.
We’ll go through the Budget vs Actual screenshot below for Craig’s Design and Landscaping Services to help us walk you through a typical report.
Throughout this post, I’m going to refer to the Budget vs Actual report for Craig’s Design and Landscaping Services from QuickBooks Online, their Sample Company. (Did you know that you can test drive QBO?? Comment below if you’d like the link for this sample company account!)
Starting at the top of the Report, you should see four columns: Actual, Budget, Over Budget and % of Budget. Much as the name implies, the Actual column shows your actual results for the time period covered by the report, usually year-to-date or last month. The Budget column shows what you had planned for that same time period. The Over Budget column does the math for you and calculates whether you were over- or under-budget for each line item. Finally, the % of Budget column tells you how close you came to the budgeted figure as a percentage.
Looking at the Total Income line, you can see that Craig’s sales for the month were $920.88 more than he expected … a great month! Craig didn’t just meet his goal, he hit 115% of his goal for the monthly sales!
Looking at the Expenses, your eye may be drawn to the larger numbers in the % of Budget column. That’s a good thing! Rather than focusing on how many dollars over budget you were, it puts things into perspective if you look at the percentages. Maintenance and Repair expenses were $240 over budget, or 34.29% higher than expected. Meanwhile, Equipment Rental was only $37 over budget, but that was a whopping 49.33% higher than expected! Due to several higher than expected costs, the Net Income line came in at a small loss instead of the expected Net Income of $2,104. Bummer, right?
All of these numbers should not be reviewed in a vacuum. Rather, they should make you ask questions. What happened in June to cause Maintenance and Repair, Equipment Rental and Job Expenses to be so much higher than expected? I would guess that a major piece of equipment broke down and had to be repaired while a replacement was rented for a few days. If that’s what really happened, great! If not, it’s time for you to put your detective hat on and dig for some more answers.
Every significant difference should stimulate questions. Why did that number come in so much higher than expected? Why didn’t I spend as much money on that category as I had budgeted? What the heck happened to my big sales goals??
As the saying goes, “What gets measured gets managed.” By reviewing each line and seeing how it compared to your expectations, you’ll gain a better understanding of your finances and have a chance to make course corrections. If your sales were lower than expected, do you need to hustle a little more? Maybe you should run a promotion to make some more sales? Or maybe you need to raise your prices? The Budget vs Actual Report won’t necessarily hold those answers for you, but it will let you know what areas of your business need a little extra attention.
Similarly, if your month was better than expected, how did you do it and can you do it again? Were you better at keeping costs down or did you find that perfect price point that heated up your sales? Do a little detective work to figure out what worked and put some systems in place so you can do it over and over again.
As you might imagine, it takes some time — and more than a little coffee! — to prepare this budget at the beginning of the year. Some work upfront gives you a better understanding of your business all year long, though, so it’s time well spent. If you didn’t start the year with a budget, it’s never too late! Put together a budget for the next three months and start from there. It will give you some practice with budgeting and help you learn how to compare your actual results against your budgeted figures.
Last, but certainly not least, you will want to make this report a part of your monthly routine. Each month, close out your books, reconcile your accounts and run your Budget to Actual Report. Use this report as a report card for your business to see how well you’re doing in keeping your costs under control and hitting your targets throughout the year.
Now you know how to read a Budget vs Actual Report! Pat yourself on the back with the knowledge that you’re now ready to steer your small business towards better profitability and the next level of business growth. Congratulations!
Have a question on how to read your Budget to Actual Report? Leave a question below.
Don’t forget to come back next week for a deep dive into the Cash Flow Statement. Trust me, it’s not as boring as it seems!
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.