Budget vs Actual: The Golden Ratio

Note before reading:

Category 1: No (real) budget created;
Category 2: Budget created, not reviewed;
Category 3: Budget created, reviewed regularly.

If you are in the first or second category above, the ideas in this article may be a stretch. If you are in either of the top 2, and want to move into the third, get in touch. You’ll be on top of your finances within 2 weeks - guaranteed.

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Budgeting is vital, and accuracy is paramount, when you’re trying to manage cashflow. If you budget incorrectly either way, you could have a challenge.

Under-budget: You need more money than planned, now you’re scrambling to raise cash for managing expenses.

Over-budget: Too much resource tied up, could have been used better elsewhere. Other areas had to plan around a smaller budget, potentially losing out on a lot of benefit.

Setting a budget that is regularly reviewed is tough enough (and not every business even does this). What would the next level up look like? Real-time review of Performance against Planned, and taking proactive and/or remedial actions.

Enter: The Golden Ratio. This is my favourite financial tool (and it goes beyond strictly finance, too. I’ll explain that shortly), and is surprisingly easy to implement. The Ratio is Budget v/s Actual.

On the face of it, it may seem overly simple. But the usefulness of this tool is in the timing. If you could see, in real-time, where the business was getting dangerously close to a budget limit, you can work to manage it proactively, instead of finding out when your team comes asking for funds, or - even worse - after-the-fact. On projects, through departments, across multiple time-periods, this Ratio can help show where assumptions were right or wrong, and help mitigate problems in real-time.

How does it go beyond finance? You can use this tool to track the ‘budget’ for almost any resource in the company. Some examples are:

1. Time (per project, per customer, overtime) allocated v/s utilised
2. Material (usage, inventory management, shortage, defect) allocated v/s utilised
3. Issues or complaints (contingency planning, manpower or personnel requirement, supplier or customer complaints) expected v/s real

How do you start using the Golden Ratio?

Personalise:

Ensure that every department develops their own ‘budgets’ to track (remember, it doesn’t have to be just money).

Populate:

Set the process in motion so that departments populate data categories accurately and regularly. This can be run daily or weekly, but not less frequently than weekly (unless the number doesn’t change in between).

Publicise:

Share the budget v/s actual variances with the team. This will have a huge impact on accountability, and will help to ignite a competitive spirit to keep the numbers where they need to be.

There are many tools available to help you do this. The simplest way is to use Excel, developing a simple spreadsheet, with a date, metric, budget and actual numbers. At Kaizen, we (and a number of our clients) use Zoho, which can provide even better visibility. To get started properly, you need to be monitoring the right items or categories.

Want to accelerate your success on this initiative, and get a better handle on your money? Get in touch, and let’s see how much more your business can do.