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How Plan Vs Actual Comparison Helps You Manage Your Business

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Plan vs Actual Analysis: A Guide to Better Business Management

Planning is not just about the plan — it’s about the management. And plan vs. actual analysis, also called variance analysis, is essential to better business management. That’s where you track results, review progress, and make regular course corrections depending on performance.

At the heart of it is our favorite quote about planning, from former president and military strategist Dwight D. Eisenhower:

The plan is useless, but planning is essential

And planning means tracking the actual results, comparing them to the original plan, and managing the difference.

What is plan vs actual?

To put it simply, plan vs actual is just the active review and adjustment of financial forecasts based on your real-world financial results. During this process, you’ll also be reviewing your actions during that period to better contextualize your results. In accounting, this is also known as variance analysis, which is just a different term for the same concept.

It’s all about comparing what really happened to what you thought would happen. Your plan sets down strategy, tactics, essential numbers, and execution. Tracking progress and results gives you what actually happened. And dealing with the difference between plan and actual is just you steering your business with better, and more direct, management.

Example of plan vs actual

The practice of comparing predictions to results seems pretty simple, right? But to truly understand the benefit of plan vs actual comparison, we should look at an example.

Start with your plan

The illustration below shows a view of the sales forecast for a bicycle store. It’s an educated guess, done by the owner, based on past results and expected changes. She forecasts sales by forecasting units, the average price per unit, and sales as the product of unit times price.

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Compile your actual results

The following illustration shows a sample of the actual results, from the accounting reports of the same bicycle store shown above. Without even diving into a detailed comparison, you can immediately see some differences.

Compare the two financial statements

In this sample case, which is about sales, more is good: more units, higher price, or higher sales. And less is bad: fewer units, lower price, or lower sales. Good is called positive variance and bad is called negative variance. You can see the results in the following illustration.

Comparing your forecasts to actual accounting data should be fairly straightforward. Specifically, when looking at individual line items, you should be able to subtract your actual results from your forecasts. The trick is keeping these documents up to date and automatically producing the variance between them.

Positive variance vs. negative variance

To see how positive and negative variances work let’s compare the plan, results, and variance for New Bicycles sales in March. There is a negative variance of 5 for unit sales because the plan was 36 and actual sales were only 31 units. But there is also a positive $115 variance for the average price because the plan was $500 per bicycle sold, and actual sales brought in $615 per unit. And the sales variance overall is a positive $1,053, because the estimated total sales were $18,000 and the actual sales came out to $19,053.

Positive or negative changes by context

We can see in all the above examples that with sales, generally more is good and less is bad. But even in the March example, it’s a bit complicated. Sure, fewer units were sold than anticipated but they were sold for a higher price. Ideally, you would have also sold more units at that higher price point and saw positive variance across the board, but it was just a tradeoff for that month.

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Now that reverses with the variance analysis of costs, expenses, and spending. In those cases, spending more than planned (or budgeted) is by definition bad, so you’d view that as negative variance; and spending less than planned is by definition good, so positive variance.

Let’s check out another example, in this case, we’ll check out the expenses for that same bike shop. First, let’s look at the expense budget also known as the expense forecast.

And then we see the actual expenses, as they come from your accounting statement, after the fact.

And from there, we compare the two to find the variance. Notice in this illustration how spending more than budgeted creates negative variance, and less than budgeted is positive variance. That’s exactly the opposite of what happens with sales.

Take the rows for marketing expense, as an example. Marketing spending was less than planned in March and April, so those variances are positive ($41 and $326, respectively). And marketing spending was more than planned in May, so that variance is negative. While on the surface this may seem complicated, thankfully you’ll look at each statement separately to avoid any confusion.

Why you need to compare your plan to actual results

All of this work is about actual better business management, not just an exercise in accurate accounting. This is about steering your business. Gathering the numbers together and finding the variances, is just the beginning. What comes next is turning those differences in forecasting and performance into practical management strategy.

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It may just look like detailed accounting management but it truly represents the lifeblood of your business.

A deeper look at your sales numbers

Take, for example, the plan vs. actual analysis in the sales example above. We see we sold five units less than planned, so that’s bad. But on the other hand, we got a lot more per unit than what we’d planned. So the most important number there is that total sales are more than $1,000 above what we expected.

Those numbers should be the starting point for thought and discussion. It generates important questions, such as: How did we get the price higher? Was it worth it? Should we refocus marketing to take advantage of what this tells us? Should we revise the plan for future months, to look for higher prices even if that means lower units?

These discussions are where you get the value in the planning process. They give managers a better understanding of ongoing results, and can often lead to course corrections.

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