An Approach to Compare Actual to Plan

It is February 16th.  By now you should be finalizing your January 2012 P&L.  What matters now, is what you do with the information.   While one month should not cause you to make changes to your business plan, it is a data point in an evolving trend.  Following are recommended activities —

Measure

Compare actual results to your planned results.   In theory, these plans have only been around for 45 to 60 days.  The actual for the month of January should be the closest to your plan than any single month in 2012.  How do your January Actual Revenues compare to your 2012 January Planned Revenues compared to your 2011 January Actual Revenues?  Complete this type of comparison for all p&l line items.   Compute the numerical variance and distribute the data to the appropriate cost center manager.

Variance Analysis

The most productive process I participated in, included monthly meetings where cost center managers discussed revenues and expenses achieved in the current month, compared to the plan they developed, with the responsible executive manager.  This approach was vital in creating an environment of accountability.  The purpose of the meeting was not to brow beat the manager, but to understand if the budget created was unrealistic or a situation where subpar performance needed to be addressed.  The greatest value in this process was to gather information from the point of sale, i.e. what was working vs. what was not working.

Forecast

In some instances, a production shortfall in the current month will be made up in a later month.  But sometimes that will not occur.  After the first quarter, monthly reports should show four different comparison points, i.e. actual vs. plan vs. variance vs. forecast.  This last value will provide executive management and the board with an accurate representation of what to expect in the current full year, financially.

Corrective Actions

If results vary widely from what was expected, the conversations during the cost center manager meetings gravitated to “what can be done to fix the shortfall” or “how do we prepare for the unexpected increased business we are experiencing, to ensure customer service does not suffer.”  Many constructive ideas were borne out of these meetings.

After following this process for a few months, you should see a slight change.  Managers will  understand they are accountable for their respective cost center; and that process corrections are being implemented quickly and efficiently.  Most importantly, executive management will be in the communication loop monthly.

Please share your thoughts.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2012 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

32 thoughts on “An Approach to Compare Actual to Plan

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  11. I agree with what has been said. I have always found that zero based budgeting works best for us with tactical/monthly budgets. We like to look at the fixed/period costs seperately as they relate to certain sales volume levels. If we separate the variable functions out and budget pricing, volumes and yields it becomes eaiser to understand and manage the monthly variances. I’ve always heard that failing to plan is planning to fail, and I’ve foung that the more time put into the budgeting and review process the easier it is to manage the business. We couple our budgeting process with realistic goals and spending justifications. (sorry for all the spelling errors, can someone put a spell checker on this thing?)

  12. This also highlights the importance of preparing realistic, detailed budgets. Preferably, these should be prepared by Dept heads/Cost Center Mgrs so they can “own” their variances from Plan.
    It would be interesting to hear more about the budget preparation process and pros/cons of the various methodologies; i.e. zero-based vs. incremental, etc.

  13. Yeah ! I fully agree with this approach.
    Just to add – this is the way to function for any organisation which thinks of creating a culture of accountability as this dwells on measuring, reviewing and jointly addressing the hows to make it happen in a most involving manner.
    What is critical is to have a process in place to address these things in structured manner thereby creating certainity in reviews and expectation towards reviews.

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