8) BUDGETS
REPORTING, CONTROL
and ANALYSIS
ADE Business Communication Page 1
Companies set goals each year regarding their
performance, their sales levels and their profitability. The
company expects supervisors and employees to take an
active role in helping the company achieve its goals.
Throughout the year, senior management reviews the
financial results to determine the level of progress the
company makes toward achieving its goals. One method of
measuring whether the company met its goals involves
reviewing the budget versus actual variance.
By: Kathy Adams McIntosh
Variance report- New Forecast vs Master
Budget W EUROPE W EUROPE
BUDGET 06 FORECAST 06 Variance Fcst vs Budg
Total % NR Total % NR
Volume (MSU) 3,140.8 3,192.5
Gross Revenue 115,646.7 153.9% 110,947.3 151.9% (4699) -4.1%
Trade 40,509.7 53.9% 37,898.7 51.9% (2611) -6.4%
Net Revenue 75,137.0 100.0% 73,048.6 100.0% (2088) -2.8%
Raw Materials 10,458.6 13.9% 11,684.1 16.0% 1226 11.7%
Packaging Materials 15,663.4 20.8% 14,667.3 20.1% (996) -6.4%
Manufacturing Expenses (excl. depreciation) 8,322.7 11.1% 7,902.4 10.8% (420) -5.0%
Subtotal Production Costs 34,444.6 45.8% 34,253.7 46.9% (191) -0.6%
Subtotal Logistic Costs 12,578.94 16.7% 12,144.69 16.6% (434) -3.5%
Total Cost of Goods Sold 47,023.53 62.6% 46,398.42 63.5% (625) -1.3%
Gross Profit 28,113.44 37.4% 26,650.2 36.5% (1463) -5.2%
Subtotal Brand Support 14,820.00 19.7% 11,816.0 16.2% (3004) -20.3%
Brand Contribution 13,293.44 17.7% 14,834.2 20.3% 1541 11.6%
Personnel Expenses (Incl. T&E) 6,329.12 8.4% 6,329.1 8.7% 0 0.0%
Marketing 500.00 0.7% 1,638.4 2.2% 1138 227.7%
Other* 3,351.52 4.5% 3,769.8 5.2% 418 12.5%
Subtotal SG&A 9,680.65 12.9% 11,737.4 16.1% 2057 21.2%
EBITDA 3,612.79 4.8% 3,096.9 4.2% (516) -14.3%
Budget Control
• Remember: A budget provides focus for an organization, it
aids the coordination of activities, allocation of resources
and direction of activity.
• Planning is achieved by means of a fixed master budget,
whereas control is generally exercised through the
comparison of actual cost with a flexible budget.
Budgetary control is defined as:
The establishments of budgets relating
to the responsibilities of executives to
achieve certain objectives and
The continuous comparison of actuals
with budgeted results either to secure by
individual action or to provide a basis for
its revision
Budgets Control
Budgetary control entails
MEASURING
REPORTING
ANALYZING and
giving FEEDBACK
On budget performance
Budgets Control Cycle
2. REPORTING
IDENTIFY VARIANCES
INVESTIGATE VARIANCES
1. MEASURING GET FEEDBACK 3. ANALYZING
DEFINE CORRECTIVE ACTIONS
GET AGREEMENT ON ACTIONS
4. GIVING FEEDBACK
Formalized reporting system
Budgetary control works best with a formalized reporting
system:
–Identify the name of the budget report.
–State the frequency of the report, such as
weekly, monthly, quarterly, etc.
–Specify the purpose of the report.
–Indicate the primary recipient(s) of the report.
Examples of reporting
2. REPORTING
IDENTIFY VARIANCES
INVESTIGATE VARIANCES
1. MEASURING GET FEEDBACK 3. ANALYZING
DEFINE CORRECTIVE ACTIONS
GET AGREEMENT ON ACTIONS
4. GIVING FEEDBACK
Variances
UNPREDICTED, SUPRISING,
UNEXPECTED VARIANCES
ARE NOT GOOD
This could imply a poor finance control
and communication
1. Identify Variances
Important to capture them both in:
- Absolute number
- Percent - %
Depends on the business size → 1,000,000€
could be a 2% variance, or a 25%
1. Identify Variances
➢ Negative ones- not always bad
➢ Positive ones- not always good
Deep Analysis is needed
1. Which variances should be
analyzed?
It varies company by company.
The trigger to analyze variances could be:
• the value,
• the % of variance
• the importance of such spending or income over the
total
• ratios (i.e. turnover, SG&A/ sales, COGS/ sales, etc.
2. Analyze and investigate variances
-Positive/ Favorable variances
→ Better than expected results
Could imply a Poor forecast work
→Too pessimistic or conservative
2. Analyze and investigate variances
… cont´d
-Negative/ Adverse/ unfavorable variance
-> A worst than expected result
- Analyze size and direction of variance, controllability,
permanence
- Could imply a too optimistic budget
3. Get Feedback
Top management to:
- Understand reasons of variances
- Seek for explanations
- Review budget process
- Look for individual goals alignment with Company
objectives
- Understand Performance evaluation
Principle of Performance evaluation
The human factor is critical in evaluating performance.
Behavioral principles should include:
a. Managers of responsibility centers should have direct input into
the process of establishing budget goals of their area of responsibility.
b. The evaluation of performance should be based entirely on
matters that are controllable by the manager being evaluated. At
Management level this is a shared responsibility for overall results.
c. Top management should support the evaluation process.
d. The evaluation process must allow managers to respond to their
evaluations.
4. Take Corrective Actions
• Decide on solutions to adverse variances
• Decide on contradictory goals or culture:
– (i.e. you encourage a very conservative budget, but want
a 99% of accuracy)
• Budget should be reviewed at regular intervals
because changes on environment may need
preparation of revised budget or new forecast .
Watch out!!
• Too much analysis drives to paralysis
• Control is key but do not over-do it
.
• Avoid bureaucratic practices
• Calibrate the size/complexity of the business and
context of the financial situation
Done with Budgeting
theory!!