Opinion Question: How do you Calculate Expense Budget Variance?
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:
- You have budget available
- You have overspent
Comments
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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.
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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.
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