Opinion Question: How do you Calculate Expense Budget Variance?

mkozai

We have an internal debate among executives here and I am curious what everyone else here does and thinks.  When thinking of sales I think it is an easy answer.  Actual - Budget = Variance.  If you exceed your budget in sales that is a good thing and so we can show that as a positive number.  However when looking at expenses the game changes.  Now exceeding your budget is not a good thing.  So my question to everyone is this.

 

When calculating an expense budget variance which equation do you use: 

 

Option 1:

Budget - Actual = Variance

Option 2: 

Actual - Budget = Variance

Or put differently does a positive variance mean: 

1. You have budget available
2. You have overspent

GrantSmith

I keep it consistent where OVER budget is represented in the positive and UNDER budget is represented in the negative. I may make some colorization changes representing one as green and the other as red if it's good or bad respectively. This keeps a consistent definition to avoid confusion and also easily illustrates if it's good or bad.

mkozai

Thanks for the feedback Grant.  This is exactly the perspecitve of our CEO.  He wants an overage to always be represented as a positive number, regardless of the flow of cash.  The more I think about it the more I can see both of your points.

 

I think the answer depends on how you look at your budget.  Is your budget a number that you are just trying to not exceed? Or do you treat it like a bank account? I think some users are always asking the question, how much money do I have left to spend.  And if you have never managed a corporate budget, the only place you have exposure to this is your bank account.  In this case, a positive number means you have money to spend.  

 

Anyway I created a survey and posted it to linkedin.  So far the response is 50/50.  Although your response here tips the scale towards Actual - Budget.  

 

 

 

 

mkozai

Thanks for the like @Neeti.  Would love to hear what you think.