When you are running a business, it can be difficult to know how much progress you are making. Using the plan vs actual comparison will help you manage your business better.
The planned vs actual variance formula is a way to compare the difference between what was planned and what was actually achieved. This can help you manage your business.
It’s not only about the plan when it comes to planning; it’s also about the management. And variance analysis, often known as plan vs. reality analysis, is critical for improved company management. This is where you keep track of your findings, evaluate your progress, and make frequent course adjustments based on your results.
Our favorite planning phrase, from former president and military leader Dwight D. Eisenhower, lies at the core of it:
The plan is ineffective, but preparation is necessary.
And planning entails keeping track of the actual outcomes, comparing them to the original strategy, and dealing with the discrepancy.
What is the difference between a plan and a reality?
Simply stated, plan versus actual is the process of actively evaluating and adjusting financial predictions depending on real-world financial outcomes. You’ll also be evaluating your activities throughout that time period in order to properly contextualize your findings. This is also known as variance analysis in accounting, which is simply another name for the same idea.
It all comes down to comparing what really occurred to what you expected to happen. Your strategy, tactics, key statistics, and execution are all outlined in your plan. Keeping track of progress and outcomes allows you to see what really occurred. Dealing with the gap between plan and reality is as simple as directing your company with better, more direct management.
The following is an example of a plan vs. real situation.
Comparing forecasts to outcomes seems to be a very straightforward procedure, right? However, we should look at an example to fully grasp the advantage of a plan vs. reality contrast.
Begin with your strategy.
The image below depicts a glimpse of a bicycle store’s sales projection. It’s a calculated estimate made by the owner based on previous performance and anticipated improvements. She predicts sales by calculating unit sales, average unit price, and sales as the product of unit and price.
Compile your real-world data
The next graphic depicts a sample of the real findings from the same bicycle store’s accounting reports as displayed above. You may notice several changes right away without even doing a thorough comparison.
The two financial statements should be compared.
More is better in this example, which is about sales: more units, a higher price, or more sales. Less is negative, whether it’s fewer products, a cheaper price, or fewer sales. Variance that is positive is a good thing, while negative variance is a bad one. The findings are shown in the diagram below.
It should be very simple to compare your predictions to real accounting data. You should be able to deduct your actual outcomes from your predictions when looking at individual line items. The key is to maintain these papers up to date and calculate the difference between them automatically.
Positive vs. negative variance: what’s the difference?
Let’s examine the plan, outcomes, and variation for New Bicycles sales in March to understand how positive and negative variances operate. Because the plan was 36 units and actual sales were only 31, there is a negative variation of 5. However, there is a $115 difference in the average price since the goal was for $500 each bicycle sold, while actual sales were $615 per unit. And since the anticipated total sales were $18,000 and the actual sales were $19,053, the overall sales variance is a positive $1,053.
Contextual changes may be positive or harmful.
We can see from all of the above instances that in general, more is better and less is worse when it comes to sales. Even in the March example, though, things are a little more complex. Although fewer units were sold than expected, they did so at a higher price. Ideally, you would have sold more items at that higher price point and had positive variation across the board, but for that month, it was simply a compromise.
With the variance analysis of costs, expenditures, and spending, this is reversed. Spending more than intended (or budgeted) is by definition bad, so you’d consider it negative variance; spending less than planned is by definition good, so you’d consider it positive variance.
Let’s take a look at another example, this time looking at the expenditures for the same bike store. Let’s start with the cost budget, often referred to as the expense projection.
Then, after the event, we see the real expenditures as they appear on your accounting statement.
Then we compare the two to determine the variance. In this diagram, spending more than planned results in negative variance, while spending less than budgeted results in positive variation. That is the exact reverse of what occurs in sales.
Take, for example, the marketing cost rows. In March and April, marketing expenditure was lower than expected, resulting in positive variations ($41 and $326, respectively). In May, marketing expenditure was more than expected, therefore the variance is negative. While this may seem complex at first glance, you’ll be able to prevent any misunderstanding by looking at each sentence individually.
Why is it important to compare your strategy to real outcomes?
All of our effort is about improving real company management, not simply accounting accuracy. It’s all about directing your company. Gathering the data and determining the differences is just the beginning. The next step is to convert the forecasts and performance discrepancies into a realistic management plan.
It may seem to be simply precise accounting administration, yet it is the lifeblood of your company.
Taking a closer look at your sales figures
Consider the plan vs. reality analysis in the previous sales case. We sold five units fewer than anticipated, which is a problem. On the other hand, we received much more per unit than we had anticipated. The most significant statistic is that overall sales are almost $1,000 more than anticipated.
Those figures should serve as a springboard for further thinking and debate. It raises significant issues, such as: How did we increase the price? Was it all worthwhile? Should we refocus our marketing efforts to take use of this information? Should we rethink our strategy for the next months, aiming for higher pricing even if it implies fewer units?
The value in the planning process comes from these conversations. They provide managers with a greater knowledge of current outcomes and, in many cases, lead to course adjustments.
Taking a closer look at your spending
Now let’s look at the marketing cost plan vs. reality comparison. In March and April, we can see that there was a positive variation (spending less than planned) for marketing costs ($41 and $326, respectively) as shown in the graphs. In May, there was a $265 negative variance.
And, once again, this should prompt you to ask questions in order to figure out why it happened.
Was it, for example, a good thing to spend $326 less than planned? Although the difference is good, what if the reduced expenditure was due to poor management and execution? What if the decrease in expenditure was due to a lack of advertising? What if the promotions weren’t running? Perhaps the marketing manager was behind schedule and didn’t get enough work done.
And what about the $265 overspend in May? It’s a case of negative variance. It’s a waste of money. However, it’s possible that it was just catching up on the April execution that went short. The concept is to have a conversation that leads to improved vision and company management.
Insights on the differences between your plan and reality
Some of the answers to these questions can no longer be found in a single financial statement examination. To fully understand why certain things happened, you’ll probably need to compare data from areas like sales and expenditures.
In April, we observed a shift in sales and expenditure, based on our data. Are those outcomes connected? Is it possible that a shortage of advertising budget resulted in bikes having to be offered at a cheaper price?
Isn’t it obvious from an objective standpoint? You’ll need to bring insights from each plan vs. reality analysis to the table to identify where they connect and where they don’t.
What financial aspects of plan vs. reality can you compare?
We just looked at one example of what a plan vs. reality analysis may reveal. However, this method may be used to examine other financial aspects of your company.
Sales
You may simply analyze your income and sales month to month, just as in the example above, to discover particular buying patterns.
Expenses
Looking at your expenditures across different areas, like we discussed in our bike shop example, is a vital assessment you should be conducting. It may assist you in identifying ineffective management procedures, excessively costly initiatives, and the real return on your investment.
Cash flow
Accurately analyzing and revising your cash flow predictions based on your cash flow statements may be even more important to your company. Cash is your company’s lifeline, and your cash flow can tell you how healthy it is, how long your cash runway is, and where you’re losing money.
Profit and loss are two different things.
Looking at your total profit or loss, which is a mix of several of these statements, may help you get a better sense of your company’s success. This takes you beyond particular sales or expenses and enables you to determine whether or not your company is profitable.
Actual Analysis vs. what to look for in your plan
As we have said, strictly comparing your statistics is insufficient. To properly comprehend what any discrepancies between actual outcomes and your predictions actually imply, you’ll need context. These are the main things you should be searching for to assist guide your evaluation process.
Positive variance
A positive variance, as we saw in our sales and expenditures examples, is any scenario in which you exceeded your expectations. An rise in sales, units sold, a reduction in expenditures, or an inflow of cash flow are all examples of this.
Keep in mind that a positive variance may indicate optimal performance rather than an increase, depending on which statements you’re looking at. The most obvious example is a reduction in costs.
Variance that is negative
Negative variance is the polar opposite of positive variance, and it refers to any situation in which you underperformed relative to your anticipated strategy. This may be due to a drop in sales, units sold, cash flow, or expenditures. Similar to positive variance, depending on the statement you’re looking at, this may be turned into a rise, with an increase in expenditures being the most apparent example.
Customers’ curiosity
Overall consumer interest is maybe the most essential element of what you should be searching for. Any discrepancy between your goal and actual outcomes is sparked by this aspect, which prompts debate, investigation, and a specified context.
This is a difficult measure to define since it is not a simple numerical metric. It’s important to approach analysis with particular objectives in mind to really understand how customers are responding.
Have you started a new marketing campaign? Did you alter your pricing strategy or provide a discount? Perhaps you launched a new product line or a new feature?
Starting with what you did, modified, or altered, and comparing your expectations to reality may give you a good idea of how well you know your audience. It may also help you modify expectations going ahead by ensuring that any successful approach or bad outcomes are promptly addressed.
It’s critical to have a regular plan vs. real analysis meeting.
If it wasn’t obvious from the beginning of this essay, a plan vs. reality analysis should be done on a frequent basis. It’s pointless to do it once and expect good outcomes or a viable management plan. Normally, you’ll do this once a month to ensure that your predictions for the next month are more accurate, but it may be essential to do it more often during times of growth or during a crisis.
You’ll need to create spreadsheets with particular formulae and manually enter up-to-date accounting data to make this analysis process more efficient and simple. With our sales forecast and balance sheet templates, you can get a head start on creating your own data sheets. If you prefer a simpler solution that you can link directly to your accounting software, LivePlan is a good option.
LivePlan makes it simple to predict and compare outcomes with automated financials, and it consolidates everything into one platform, making it easier to compare your plan to reality. But, regardless of whether you do it manually or using a program like LivePlan, this is a process you should start as soon as feasible. It will assist you in taking a closer look at your outcomes, predicting performance more precisely, and better managing your company.
The planned vs actual percentage is a tool that helps you manage your business. It allows you to compare the plan and the actual performance of your company.
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Frequently Asked Questions
How does plan compare to actual?
The plan is to compare the actual event to a hypothetical one.
Why is a comparison between budget and actual results important?
It is important to know the difference between budget and actual results. Budgeting is estimating how much money you will need for a project, while actual results are the amount of money that has been spent on a project.
What is the difference between planned and actual expenses?
Planned expenses are the amount that you think you will spend in a year or other period. Actual expenses are what you actually spend.
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