Many small business owners think of budgeting as a non-essential task, something they'll get to when they have time. These leaders, who operate their businesses without a formal strategic financial plan, are doing themselves a major disservice, as it can be impossible to consider how far their company has come, when they have no starting point or means of tracking progress.

Rather than fly by the seat of their pants, these business leaders need to conduct a budget vs. actual comparison. This process involves using financial data to assess how closely a company's spending and generated revenue meets the financial forecasting projections included in its budget. By taking the time to conduct this comparison, business leaders can determine the following: whether there are areas that need more funding; whether the budget is realistic; and whether they are on pace to meet their long-term objectives.

Below are a few tips for understanding budget vs. actual comparison.

What are reasons for the variances?

There are several reasons why there will discrepancies between the budget and the actual amount for expenditures and revenues. These differences can occur because of the strength of the economy, consumer needs or preferences and the actions of competitors. Because these factors can be unpredictable, it's important for small businesses to reflect on the exact cause or causes that resulted in the variance.

How can small business owners interpret the variances?

Creating a budget vs. actual comparison is extremely important for small businesses because it allows them to alter their future financial forecasts based upon the numbers collected in the monthly reports. Small business owners can see where the budget can be improved, as well as parts of the budget that were very accurate. Through better planning, monitoring, evaluating and controlling, small business owners can improve their processes after analyzing the budget vs. actual comparison.

What can be done about the variances?

Depending upon how the actual results compared to the budget, small business owners can make the necessary adjustments to their budget. Whether it be modifying ongoing expenditures or strategies, or cutting back spending on marketing and advertising, small business owners need to use this informative data to improve their budgeting strategies and enhance their operations. However, small business owners should be sure not to overreact and change their budget drastically based on temporary factors that will affect a business for only a short period of time.

var addthis_config = {services_compact: ‘facebook,twitter,linkedin’}