07 May What is Budget Reporting?
Budget reporting is the process by which a company measures its actual achievement against its targeted figures. This helps it to see if it is on track to meet its business objectives. It also enables the company to take corrective action where it is required.
What does budget reporting mean?
A budget report plays an invaluable role in helping to manage a business. At the beginning of the year, every firm prepares a financial budget. This estimates the sales that the company expects to achieve during the year. It also provides particulars of the different expenses that the company will need to incur.
The budget statement is prepared once a year. However, variances are usually tracked every month. This is a crucial step. It helps a firm to identify the areas that need attention.
A review of the budget report may find that sales are below target. If this happens, the business manager will need to initiate corrective action. This may take the form of recruiting more sales staff, altering the incentive program for salespersons, or even lowering the prices that the company charges for the goods that it sells.
The budget report also allows a business owner or manager to review costs. Do certain expenses exceed budgeted amounts? If the variances are high, corrective action may need to be initiated. To make the task of analyzing variances easier, a budget report usually contains four columns:
- Budget – this column contains the details that are prepared at the beginning of the year. A firm may decide that it will aim for yearly sales of $1 million. Similarly, the budget for expenses on salaries may be fixed at, say, $175,000.
- Actual – this column will provide details about the actual results for the period under review. It will be compared with the budget for the same period.
- Over budget – the over-budget column is the result of the previous two columns. It tells you the sum by which the business has exceeded the budgeted figure. Of course, it will provide details of under-budget line items as well.
- % of budget – this column will tell you the under / over percentage achievement against the budget.
Example of budget reporting
Tyson Traders prepares the budget report for the month of April:
Tyson’s Traders’ proprietor can use this information to take the necessary corrective action. His budget report tells him that he needs to:
- Increase sales.
- Cut down on salary expenses.
- Reduce traveling and office expenses.
The legendary management consultant Peter Drucker said, “What gets measured, gets managed.” By allowing you to compare actual figures with the budget, a budget report helps you to manage your business and achieve your goals.