Best practices to monitor budget VS actuals

‍As a Subscription-based business, managing your finances is crucial for reaching your goals and continuing to grow. Creating a budget is a good first step, but you need to track actuals against your budget to forecast or model future financial goals accurately. And as a founder, you want to ensure your performances align with your expectations.

‍Analysis of budget vs. actuals provides valuable insights into how well you're meeting your financial targets. It allows for necessary adjustments, leading to better financial forecasting and understanding of cash flow. It is a great way to maintain a clear picture of your company’s performance by assessing how well your business follows its financial plans, calculating variances, understanding which variances are significant, and improving overall financial performance.

‍Financial planning is essential for sustaining and growing your business. While much effort goes into creating and approving the yearly budget, financial management doesn't stop there. This article aims to give you clear and actionable advice on how to accurately analyze budget vs. actual statements and help you identify where your business reality deviates from the plan to improve your financial accuracy and achieve long-term success.‍

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Understanding budget vs. actuals

You must dive deeper into budget vs. actuals to ensure precise financial management for your business. This involves a detailed comparison between your company’s projected budget and financial outcomes. By evaluating these variances, you can pinpoint where spending may be off track or where revenue expectations are not being met. 

📌 For example, if you initially estimated a three-month CRM software development project to cost $75,000, comparing this figure with the actual expenses helps you spot discrepancies early on and manage resources more effectively. 

Regular budget vs actuals analysis brings discipline and scrutiny to your financial operations, highlighting areas where money is being efficiently utilized or wasted. It ensures alignment with financial goals and builds confidence among investors by showcasing responsible fiscal management. 

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Key benefits 

Here are concrete benefits of monitoring budget vs. actuals:

1. Improved financial control: Know how your funds are utilized compared to your plan.
2. Informed decisions: Decision-making and strategic planning are made easier with accurate data on your financial performance.
3. Mitigated risks: Regular monitoring will help you identify overspending or revenue shortfalls early to take corrective action promptly.
4. Expense management: Eliminate wasteful spending by spotting and addressing areas where costs exceed your budget.
5. Profitability and accountability improvement: Boost profit margins and operational efficiency by analyzing variances.
6. Growth opportunities: Expand your business and make informed investments by understanding financial trends.

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Understanding budget variance 

Definition

Budget variance refers to the difference between the budgeted or projected financial performance and the actual financial performance over a specific period. It highlights how much actual results deviate from the planned figures, helping SaaS founders and financial leaders understand where the company is overperforming or underperforming. 

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Budget variances can be either favorable or unfavorable. 

• A favorable variance occurs when actual revenue exceeds the budgeted amount, or expenses are less than budgeted. 
• Conversely, an unfavorable variance happens when actual revenue exceeds the budgeted figure or expenses surpass the budgeted amount.

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Importance of calculating variance

While the exact calculation of budget variance involves comparing budgeted figures to actual results using specific formulas, the core idea is to understand whether deviations from the budget are favorable or unfavorable. Analyzing these variances helps in pinpointing areas of financial performance that need attention. For example:

• If your marketing expenses are $50,000 against a budgeted $40,000, the variance is $10,000 or 25% over budget, indicating potential overspending that needs to be addressed. This could be due to higher-than-expected advertising costs, additional promotional activities, or unplanned marketing campaigns.
• Conversely, if actual revenue surpasses projections, it may highlight successful strategies or market opportunities.

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Types of variances

An essential step in monitoring your budget vs. actuals is understanding the different variances types to draw accurate conclusions and act on your strategies effectively. 

1. Revenue variance:

Favorable: Actual revenue exceeds budgeted revenue.
Example: Your SaaS business projected $500,000 in quarterly sales but achieved $550,000 due to a successful marketing campaign.

Unfavorable: Actual revenue is below budgeted revenue.
Example: You expected $500,000 in sales but only made $450,000 due to unexpected churn or market downturns.

2. Expense variance:

Favorable: Actual expenses are lower than budgeted.
Example: You budgeted $200,000 for customer acquisition but spent $180,000 due to efficient marketing strategies.

Unfavorable: Actual expenses exceed budgeted amounts.
Example: You budgeted $100,000 for R&D, but spent $120,000 because of unforeseen technical challenges.

3. Profit variance:

The net effect of revenue and expense variances on overall profitability. A favorable profit variance occurs when higher-than-expected revenues or lower-than-expected costs lead to higher profits.

📌 Here is an example scenario:

• Revenue Variance: Budgeted monthly subscription revenue of $100,000 vs. actual revenue of $90,000.
• Expense Variance: Budgeted marketing spend of $20,000 vs. actual spend of $25,000.
• Profit Variance: The combined effect results in lower profits than anticipated, highlighting the need for strategic adjustments.

Regularly monitoring and analyzing budget variances will enable your businesses to stay responsive to financial fluctuations. As a founder, understanding and addressing these variances can help you navigate financial challenges and capitalize on opportunities for growth.

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Best practices to monitor budget vs. actuals

Here is our selection of best practices for consistently and accurately monitoring budget vs. actuals, which are essential for effective financial management. 

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When to start monitoring budget vs. actuals?

Ideally, you should start monitoring budget vs. actuals once your startup has a formal budget. This is even more true for SaaS businesses - where financial dynamics can shift rapidly - to stay on track toward financial objectives​.

In the early stages of a SaaS, even if the financial transactions are few, establishing a habit of budget monitoring sets a strong foundation for financial discipline. Doing so, you will identify variances between expected and actual figures and make informed strategic decisions from the start. 

For instance, if your budget anticipated a certain revenue from subscription sales, but actual sales fall short, this discrepancy can prompt a deeper analysis into marketing strategies, product-market fit, or customer retention efforts.

Additionally, analyzing your variances early will help you set clear financial goals and follow them in the long term. Start by identifying key financial metrics relevant to your business objectives. Ensure these goals are specific, measurable, achievable, relevant, and time-bound (SMART) to provide a clear benchmark for measuring performance and guiding decision-making.

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Gather clean and accurate data

Your budget vs. actual monitoring cannot be accurate without reliable data from the start. Indeed, the integrity of the data you collect will directly impact the reliability of the variance analysis. Data sources must be homogeneous and structured to avoid inefficiencies and facilitate collaboration​. 

However, after meeting over 1000 SaaS editors at Fincome, we noted that companies don't always have such a reliable data foundation.

Notably, two SaaS editors operating in very different markets have encountered difficulties in extracting usable data from their systems to monitor their activities:

• The first, an HRtech with €5M ARR, faces a constant struggle when it comes to synchronizing data between CRM and marketing tools, particularly when measuring the efficiency of acquisition channels by calculating indicators such as CAC and LTV/CAC.

• The second, a €10+ M ARR Martech, had to consolidate data from multiple sources (CRM, billing tool, marketing data, data from their internal tool), each one having its own formats and varying levels of quality, making it very complex to build reliable business indicators.

Therefore, to ensure accuracy in financial reporting, it’s crucial to meticulously record revenue from all streams, such as sales and subscriptions, and track expenses across marketing, operations, and R&D. Breaking down data into specific line items facilitates detailed analysis and enables pinpointing of any variances.

Moreover, automated data management platforms significantly enhance accuracy and efficiency compared to error-prone and time-consuming methods like spreadsheets. Companies that rely on manual data entry often spend excessive time preparing data, limiting opportunities for thorough analysis​.

📌 TL;DR: Accurate budget vs. actual monitoring hinges on clean and reliable data. As companies often struggle with disparate data sources, automated platforms to streamline data management can enhance accuracy and analysis capabilities over manual methods.

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Regularly review financial reports and take action 

Implementing a regular review session or meeting is essential for tracking financial performance. You can schedule these reviews consistently, monthly or quarterly, and involve key stakeholders to gain diverse perspectives and foster collaborative decision-making. Try to identify variances and trends, using visual aids like charts and graphs to make the data more accessible.

Source: https://www.linkedin.com/pulse/what-budget-vs-actual-variance-saviour-thomas/

Additionally, timely responses to negative variances are crucial for maintaining financial health and growth. Develop an action plan to address identified issues and reallocate resources as necessary. 

Finally, remember to frequently track your key metrics and KPIs - such as Gross Profit Margin, Net Profit Margin, or Return on Assets, as recommended by the Harvard Business School -, to maintain a good vision and control over your financial performances. 

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‍In summary, keeping track of budget versus actual spending is crucial for Subscription-based companies to succeed. It's not just about setting a budget; regularly checking how your finances compare helps you see where you're doing well and where adjustments are needed.

Identifying variances early, positive or negative, allows for prompt adjustments to resource allocation and strategic initiatives, fostering agility and resilience. Accurate data and automated tools make this process easier and more reliable. 

By integrating these best practices, founders can maintain a clear financial trajectory, optimize performance, and position their businesses for sustained growth. As we put it, monitoring budget vs actual is about saying what we're going to do, do what we said, check what we've done, and finally, do it better!