Manage Budgets: Understand How to Report Performance Against Budgets
Managing money is a very important part of every business and personal life and it helps to have control over money in a more effective and efficient way. Budgets are financial tools for a business and performance reports are assessments for tasks or projects in business environments. Performance reports help with identifying or keeping track of variances in budgets; for example where money was spent and from where income was generated. Performance reports may also include information other than finances; for example requirement for new equipment, inventories, staff, etc.
3: Understand How to Report Performance Against Budgets
This article responds to the NVQ Level 4 unit, "Manage Budgets" and has a credit value of "5".
In order to get a clear understanding of the purpose of the budget, which is the first part to this unit, please follow the link below
For a detailed understanding of how to manage budgets, which is the second part to this unit, please follow the link below
3.1 Explain the Purpose and Benefits of Reporting Information on Performance Against Budget
In order to report information on performance against budget, one needs to monitor whether the estimated budgets go well with the actual results that are achieved. The budget holder or the budget manager is responsible for closely monitoring all these facts and data. It is also the duty of the other staff involved to provide the manager with accurate information depending on their own level of responsibility. In return managers need to provide feedback on performance and also provide suggestions and advise on any planned actions or variations.
Reporting information on performance is a process where all data right from the basics are collected and performance information is developed which clarifies details of how resources are used and objectives are achieved.
The purpose and benefits of reporting information on performance against budget are:
- It improves the effectiveness of financial reporting
- It helps to examine any risks or estimate future risks and prospects
- It helps to identify and compare the performance between current and past financial year and draw out an estimate for future budgeting procedures.
- It helps with identifying variances in the budget and results achieved. It further helps with planning and setting targets for the future performances. Variances if favourable indicate good performance, whereas variances that are not favourable indicate poor performance.
- It helps with cutting on costs and increasing profit – basically expenditure control.
- Excess money on the budget can be used to expand or develop the business. Performance reports play a good role here.
- It helps with planning the next steps that need to be taken in order for a task to be completed.
- Helps with completing forecasts for any future potential projects, need for management actions or changes in policies and procedures
- Helps with identifying errors at any point in time of the actual task or project or anything related to the business
- Helps with deciding if the budget and expenses are reasonable.
- It helps to identify who is accountable to whom and for what and it also reflects the financial plans
- Helps with correcting problems that need actions to be taken and this can be done before the problem goes out of control.
3.2 Explain how to check the accuracy of budget calculations.
Accuracy in budgeting is a very important skill when it comes to managing a company or organisation. Variances in budget from the one that is forecast can lead to shortfalls and put the company at risk. If one is thorough all through the budgeting process then they are likely to develop a more accurate budget.
How can one check the accuracy of budget calculations? Let us look at a few methods of doing so!
- Always make sure that every single item of expenditure and income related to the business are included in the budget; for example even minor items like small bills, day to day small expenses, etc.
- Check that you have added all the information related to the day to day running of the business in the budgeting process; even the minor tasks and their expenses
- When estimating costs, always make realistic assumptions; this can be achieved by thoroughly researching on that particular item on the budget. You should be able to explain your assumption along with logical reasoning.
- Do not decide on estimations all by yourself; rather take information and ideas from all the involved members of the organisation. That way it is highly unlikely for the accuracy to deviate.
- Always have some extra funds to cover variances, this will help the business function within the budget allocated thereby avoiding deviations from accuracy
- Look at each line on the budget item like training costs, donations, fundraising events, stationary etc., and estimate with utmost care. In short, list ALL income and expenditure.
- Categorise items, so that it is easier to check on each task or objective for their budgeting details. For example, expenses for training, expenses for staff salary, expenses for refurbishment, transport, legal, insurance, etc. Do this for both income and expenditure.
- Add as much detail as possible so that you have an accurate figure.
- Do an estimation of the total, an estimation of individual items and add them together to get the total; both these should tally; for example, find sub-totals of categories and sum the subtotals; find the overall total of all the items. The overall total should equal the sum of sub-totals.
- Have a standard format where you will list your budget items and do the calculations. Work out the totals using formulae and also manually. Always double / triple check calculations.
- Do checklists and take others’ help to check accuracy on items, estimations and calculations.
- Write down the amounts/costs across each individual item
- Be ready to answer any questions or doubts that may arise from the budget paperwork. Add notes and comments wherever necessary, as this will save time answering questions, make budget clearer and transparent. Refer to past budget and financial statements and do comparisons.
- Take feedback before finalising, not from just one person but get sufficient number of skilled and experienced people involved. For example, people from finance department, accountants, the project team, director, board etc.
3.3 Explain the Purpose and Benefits of Recording Information That Will Help With the Future Preparation of Budgets
When you prepare a budget for a particular year, keep a record of all information that you used to develop the budget, including notes, comments, statements and documentation that will help with future budgeting for the organisation or business.
The purpose and benefits of doing so are:
- It helps to coordinate the process of budgeting across various functional areas and integrate them for the purpose of the organisation. You know that you have the plans and materials ready for the next financial year in hand, rather than starting things from scratch.
- It helps you learn and avoid mistakes from what you learned and experienced in the past year.
- You are motivated and the process becomes a lot more easier. You do not look at budgeting as a hectic task, but rather do it with motivation. It improves job satisfaction.
- It helps with continuous improvement, helping you avoid mistakes of the past and take alternative measures to achieve better results.
- Helps improve performance of departments and the organisation as a whole. You have the basics in hand and you know where to look for resources and how to spend them wisely.
- You have a better understanding of monitoring, controlling and reviewing budgets. You can also improve performance reporting and can for sure see a huge difference in budgeting and performance reports.
- Reduces uncertainties in most areas, reduces any conflicts that may arise and improves decision making.
- Helps you to stay focussed and keep track on what direction the business is going towards. You can sit back and review performances and factors that contribute or affect the growth of the business
- Helps you with concentrating on the future of the business rather than just the present situations and performances.
I hope you found the information here useful and interesting. Please do not hesitate to feedback and share your thoughts and experiences.
Thank you for stopping by. All the best.