KPI of the Day – Accounting: % Budget variance
Definition
Measures the deviation between the actual costs and the planned (budgeted) costs for the same period. It can be applied at organizational, team, project or individual level.
Purpose
To indicate the financial discipline in executing budgets. Can be used as a tool to control costs.
Recommendations
Planning is an essential part of financial management, as well as budget spending. Budget deviation analysis is a direct mean of controlling the company’s financial discipline in terms of budget execution according to the terms initially agreed upon.
Companies develop budgets as part of their financial strategy. However, progressing towards desired company goals, while also maintaining financial discipline is sometimes easier said than done.
Some recommendations on effectively managing budget spending include:
- Linking budget to strategy;
- Efficient allocation of resources;
- The use of KPIs to track financial progress;
- Connecting cost management to budget;
- Streamlining cash flow processes;
- Built-in flexibility for unexpected spending
% Budget variance can be both positive and negative. On the one hand, the unfavorable variance that concerns organizations is indicated by positive results (such as +7%) because they outline that expenses have exceeded the budget. On the other hand, negative values (such as -7%) raise questions about the accuracy of planning or reliability of budget execution.
In addition to this, targets for this KPI should be set according to the internal procedures and standards. In the case of projects with large budgets, a deviation of +/- (5-10%) can be a large amount of money, so a +/- (3-5%) target is more appropriate.
As companies worldwide are more and more concerned with budget execution and accuracy of forecast and planning, there is an increasing interest for budget deviations. It will become very interesting to follow what major players around the world decide to do with this knowledge.
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Tags: Accounting KPIs, KPI
