As a startup founder, your ability to run your business is deeply reliant on your ability to design and manage a startup forecast. But what happens when your budgets and your actuals are no longer twinning? Let's talk budget variance and why it matters so much to strong startup operators.
Budget variance is, to be quite simple, when your actuals vary from the budgeted number you've set for any accounting line item. For example: when you budget $1000 for software-as-a-service for February, but your actuals come in at $745, you have a budget variance of -$255, which means you came in under budget. (This is mostly a yay, unless it's because you weren't able to implement a strategy you'd intended on investing in that month which is going to impact your revenue forecast for the following months... in which case it's a boo).
- Design a P&L forecast with budget variance
- Timely expense tracking
- Fitting in finance
- Actualize budgets monthly
- Download our forecast with budget variance template
In launching, scaling, and transforming 60+ brands in the last 5 years (in addition to 25 years of serial entrepreneurship), I've developed a pretty clear approach to to staying on track in order to avoid budget variance. You wanna start with an example? We've gotcha.
Download Your P&L Forecast with Budget Variance Template
How to Monitor Budget Variance
Okay, so here we go. Follow these simple steps!
Design a P&L Forecast
Set up a spreadsheet tracker for your P&L forecast. On the leftmost column, duplicate the line items that show in your accounting P&L, at a revenue and an expense level. Then create all 12 months of the fiscal, as well as a total, and allow for 4 columns under each month of your fiscal - forecast, actual, variance $$, and variance %%. Populate your budget into the forecast columns across the year. It should look kind of like this.
Timely Expense Tracking
Ensure all of your expenses are being captured in your accounting system as close to real time as possible. Our team has used both Dext and Hubdoc to immediately flip over all invoices/receipts/financial records, and our bookkeeper updates them into Quickbooks on the daily.
Fitting in Finance
Make time every week for finance. Set an hour every week to do a quick finance review. Open Quickbooks, or whatever accounting system you use, and open the monthly P&L. Open your P&L forecast tracker concurrently. Are you tracking to stay on budget? Any flags? Any things you haven't invested in that you were anticipating doing this month that will impact your ability to meet your revenue targets next month?
Actualize, Actualize, Actualize
To improve the accuracy of your budget forecast, use this P&L forecast tracker at month end, and examine any variance regularly. Are you relatively consistent i.e. within 5-10% of budget? Are there unexpected expenses you didn't think about? Were you overly hopeful on the revenue forecast side?
Keep this document up to date throughout the year and adjust budgets if you consistently see you've either over- or under-budgeted any key line items. If you're off on the revenue side, develop a sharper point of view of your forecast using a sales CRM with timing and percentages assigned. Personally, I'm a huge fan of Hubspot.
Download Your P&L Forecast with Budget Variance Template
Weekly, monthly, quarterly, and annual variance analysis is critical for entrepreneurs in order to maintain and protect bottom line targets and cash flow. The bottom line target is obvious - we all drive top line in order to have some money in the bank at the end of the year.
But more critically, on a day to day basis, your cash flow is completely reliant on the margin you retain every month (in addition to the timeline at which that cash hits the bank). If you're off the mark on a consistent basis, your cash flow plans are likely getting increasingly off each month, meaning your ability to operate the business is getting increasingly challenging.
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