I’m a huge fan of budget versus actuals. It’s basically taking your financial model or projections and comparing them every month to your actual results. For example, compare your accounting numbers versus your projection numbers. The reason why this is so powerful is it brings a lot of scrutiny and discipline to the company. Especially as a founder, you need to know what your expectations are and how you’re doing against your expectations.
That’s what venture capitalists look at, and you can expect them to analyze this regularly after they’ve made an investment (or in the months leading up to investing in your company). So, you might as well start focusing on this and get into good habits early on.
If you spend a couple of hours a month doing budget to actuals, it’ll pay for itself ten-fold.
Benefits of Budget VS Actuals
- Brings real accountability and scrutiny to your organization
- Measures how you’re really doing vs. expectations
- Gives visibility to where you are leaking money by coming in over budget
- Displays where spend is not that effective
- Ensures you’re hiring correctly
How to Calculate Budget Variance
Knowing how to calculate budget variance is like having a secret weapon for your financial management - except it’s not really a secret when the best VCs expect you to do it regularly…
It’s all about pinpointing where you stand—did you spend more than you planned, or did you hit the jackpot and spend less? Before diving into the nitty-gritty of calculations, let’s talk strategy. It’s smart to kick off with a variance analysis for your entire income statement. Yes, the whole thing—revenue and each expense section. If you have major expense or revenue categories, give them a closer look too. It helps in getting the full picture of where your money is going and coming from.
Changes in revenue can have outsized impacts on your company’s budget vs actual calculations, since high margin businesses’ revenue can really flow down the income statement and positively (or negatively) impact the bottom line. So always start with your revenue performance, and compare how the actual results did vs. the budgeted forecast.
Budget Vs Actual Formulas
Now, let’s get a bit tactical. The Percentage Variance Formula is your go-to when you want to see how your performance stacks up against different periods or growth goals.
It’s (Actual / Budget) – 1. Say, your budget was $1000, and you actually spent $1200. Your percentage variance? It’s (1200 / 1000) - 1, or 20%. That means you went 20% over your budget.
And then there’s the Dollar Variance Formula.
It’s straightforward: Actual $ - Budget $. This one’s golden when you’re all about cutting costs. So, if you budgeted $1000 and ended up spending $1200, you overshot by $200.
By doing these calculations regularly and looking at your entire income statement, you’re not just crunching numbers—you’re getting insights that can help you tweak your strategies and hit your financial goals.
One tip for VC-backed startups: part of your budget vs actuals analysis should include the change in cash out date. Have a budgeted cash zero date, and a new one updated with the company’s actual numbers, cash position and updated forecast.
Types of Budget Variances
Understanding the different types of budget variances is like having a financial microscope. It lets you zoom in on various parts of your business and see what’s aligning with your game plan and what’s going off-track. We’re talking about different financial metrics here, like revenue, expenses, and net burn. Some VCs really, really expect their founders to be able to zoom in and out, so it’s a good idea to have a strong feeling for why your actual performance is different that your budget leading into board meetings. Of course, it’s also good for founders who don’t want to run their business into the ground…
Revenue variances pop up when there’s a gap between what you thought you’d earn and what you actually did. It could be market vibes, your pricing strategies, or a bunch of other factors affecting your income. Diving deep into revenue variances helps in reshaping your sales strategies and tweaking your financial forecasts.
Expense variances? They’re all about the differences in what you thought you’d spend and what you actually did, covering fixed expenses, labor costs, material costs—you name it. Regular check-ins on expense variances are your ticket to spotting overspending and pulling the reins on your costs.
And let’s talk about net burn variances. For startups, this is crucial. It’s all about the difference between the cash you thought you’d spend and what you actually did. Knowing your net burn inside out is your safeguard against cash flow hiccups.
So, for everyone looking to get the full financial picture, doing a detailed variance analysis on each item of your income statement is key. It’s about keeping an eye on each major revenue and expense category, especially if your company’s got multiple significant revenue streams or big expense areas. It’s more than just a detailed approach—it’s your roadmap to well-informed decisions and strategic adjustments that keep you on track with your financial goals.
A common question we often get from startups is, “when should my startup do budget vs actuals?” To answer this question, I must also address the two embedded questions: the first one is, “what point in my startup’s life cycle should I start doing budget to actuals?”and the second one is, “what time of the month should I start doing budget versus actuals?” Both are pretty important.
When should you start doing budget versus actuals as a company?
Ideally, you would start doing budget actuals on day one. Even the act of doing those projections and building a financial model can be really helpful and teach you a lot about your business.
Now you might be saying “what if I don’t have a financial model?”. Well, guess what? We’ve got you covered! We have a free one on our website. You can download it. It’s awesome, and it’ll get you where you need to go in the super early days.
Eventually, you’d probably want to work with our FP&A team to build something custom that’s right for your business. But again, there’s no excuse. There’s a free financial model template on our website that you can use.
So, day one is a great time to get in the right habit of that. If you’re not going to do budget vs actuals on day one, then I would recommend starting it when you begin raising seed round. That is the time where you first took institutional capital and investors want to know that you’re doing budget to actuals and you’re a fiduciary. They want to feel confident that you will look after their money in a very professional way.
Now, sometimes founders say something like, “my team is too small and I don’t have time at the seed stage.” So at the very last point, I would recommend series A. Again, I prefer you to do it earlier, but if you’re going to wait, series A is the moment where you have to start doing this. The reason why is, the dollar amounts start getting a lot bigger in series A. For instance, you’re raising five to ten, maybe even more money if you’re really lucky. You can start spending that money, but if you overspend for a couple of months, that’s a very material amount of money. So catching that leakage and seeing things that aren’t working, has a huge value added to you.
The reason that founders get pushed out of a company is typically that they spent money irresponsibly. The venture capitalists do not want to be surprised and learn that you were running out of money six months before you said you would, because you didn’t manage to spend correctly.
So doing budget to actuals is the best act of self-preservation.
It is one of those things that will teach you good habits and make sure you don’t get pushed out of your own company. The VCs don’t want to do that. They just want to see you spend money responsibly.
Now, what time of the month?
Typically you want to have your accounting team have completed their bookkeeping work before you analyze how you did against the plan. They typically do a first close and you get everything done and then you will go over it.
We will typically deliver financials on the four Thursdays throughout the month, depending on what date our client wants. Then we will always schedule a call with our founders to go over the financial results, answer questions, and ask questions.
If you need help, or if you’re not working with someone who knows how to do this, just give us a call. We work with 550+ clients and that is not even including the clients that have been purchased or have outgrown us.
Having the conversation is important so we can do a final close of the books for the month. It’s usually not a lot of work. It is just a little bit of dotting the I’s and crossing the T’s. But at that point, you will be very confident in your financials.
Typically, in our budget versus actual process, you will spend time with our FP&A team and your account manager.
Having the conversation around the budget versus actuals can be really impactful for the founders because you can ask all the questions you might be embarrassed to ask your venture capitalists.
We are friendly, we’re here, and we are on your team. And so making that call around the budget versus actuals is very, very powerful.
As a founder, learning how to catch when you’re spending money when you shouldn’t, when you’re leaking money, or are just over budget can really improve the performance of your company.
It can extend your runway, and maybe most importantly, it’s just a great form of self-preservation. Your investors will have a lot of confidence when you tell them you’re doing budget to actuals.
So I hope this helps. Again, I cannot emphasize enough, that budget versus actuals is one of the best tools in your tool belt.
Common Budget vs Actuals questions:
What are Budget vs Actuals?
Budget vs actuals refers to the process of comparing your company’s budgeted or projected financials to its actual financial results. This comparison allows you to measure your company’s performance and see how well it is doing against your expectations. This can help you identify any areas where your company may be overspending or where you may be under-performing in terms of revenue. Doing budget vs actuals regularly can bring discipline and scrutiny to your organization, offering a clear picture of where money is being properly utilized or potentially wasted. It can also help ensure you’re meeting your financial obligations responsibly, which is especially important for startups seeking investor trust.
What are Best Practices for Solid Budget Vs Actuals?
Alright, so you’re all in on budgeting and forecasting, and you’re crunching those numbers. But how can you make sure those numbers don’t just look good on paper but also hold water in the real world? It’s all about rolling up your sleeves and getting your hands dirty in the details.
First off, let’s tackle inaccurate data. It’s the sneaky villain in your financial story, messing up your calculations and leading you astray. Whether it’s outdated financial software spitting out the wrong numbers or a simple manual data entry goof-up, bad data can throw a wrench in the works. So, double, no, triple-check those numbers, and keep your data clean and up-to-date. It’s like setting a solid foundation for your financial house.
Now, clear communication—it’s the unsung hero of accurate budgeting. It’s all about keeping everyone in the loop. Miscommunication between departments can make your budget go haywire. So, keep those lines of communication open, make sure everyone’s on the same page about budget changes, and avoid any unpleasant surprises down the line.
But hey, it’s not just about avoiding pitfalls—it’s also about maximizing your financial mojo. Regularly review your budget and actuals, keep them in sync, and make sure you’re making informed decisions. It’s about keeping your finger on the pulse of your financial performance and staying ahead of the game.
Remember, your budget is more than a bunch of numbers—it’s your financial game plan. So, be proactive, keep it real, and stay sharp. Whether it’s refining your cost control measures, tweaking your forecasts, or just getting more familiar with your financial landscape, every little bit counts. And who knows, your next big financial win could be just around the corner!