How to Use Your Budget as a Business Management Tool
The real key to a budget lies in you, as the business owner, being able to understand the information and then act on it. Here are some of the most frequently relied upon outcomes from the budgeting process.
The variance report is nothing more than taking a look at the budget and comparing it to actual results for a period of time. The example below presents a variance report for XYZ Wholesale, Inc., and compares the budgeted results for the quarter ending 3/31/15 against the company’s actual results.
Of keen importance is the increase in the company’s gross margin, which helped the company break even during the quarter compared to a projected loss of $174,000. Obviously, you need to understand what caused the gross margin to increase. Was it from higher sales prices or lower product costs? Of more importance, however, is that you need to act on the information.
If the market is supporting higher prices in general, then you may want to revisit pricing strategies for the second through fourth quarters to take advantage of conditions that may allow the company to further improve its annual financial performance.
Another use of the budget is to support the implementation of specific plans and action steps. For example, if your second dry cleaning store is set to open in the third quarter of the year, then you need to secure the staff to support this store in the middle of the second quarter and then train them to ensure that they’re ready when the new store opens.
Yes, all this data should have been accumulated and incorporated into the original budget prepared for the new store, but the idea is to turn the budget into a proactive working document (easily accessible for reference) rather than a one‐time effort left on the shelf to die.