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.
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.
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.
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.
A deeper look at your expenses
Now let’s look at the plan vs. actual analysis for marketing expenses. We can see in the illustrations that there was positive variance — spending less than budgeted — for marketing expenses in March and April ($41 and $326, respectively). And there was a negative variance of $265 in May.
And, once again, this should have you start asking questions to uncover the reason why that occurred.
For example, was spending $326 less than planned a good thing? It’s a positive variance, but what if the lower spending was due to poor management and a failure to execute? What if the spending was down because ads weren’t done? Promotions weren’t running? Maybe the marketing manager got behind and didn’t get enough done.
And the May spending of $265 more than planned? It’s negative variance. It’s overspending. But maybe it was just catching up on the execution that fell short in April. The idea is a discussion that leads to better vision, and better business management.
Insights between your plan vs actual comparisons
Now some of the answers to these questions simply can’t be found within the analysis of just one financial statement. You’ll likely need to compare results between the likes of your sales and expenses to truly uncover why certain things occurred.
Looking back at our examples, we saw diversions in sales and spending in April. Are those results related? Could the lack of spending on advertising have led to bikes needing to be sold at a lower price?
Objectively, it’s not clear, right? You need to have insights from each plan vs actual review to bring to the table to see where they do and do not connect.
What financial components can plan vs actual help you review?
We covered just a simple example of what a plan vs actual review can help uncover. But there are more financial elements of your business that you can review with this process.
Like in the example above, you can easily compare your revenue and sales to identify specific buying trends month-to-month.
Again, as we covered in our bike store example, looking at your expenses across various departments is a necessary review you should be doing. It can help you identify poor management processes, overly expensive projects, and what kind of return you’re actually getting for your investment.
Possibly even more vital to your business is accurately comparing and updating your cash flow forecasts based on your cash flow statements. Cash is the lifeblood of your business and your cash flow can tell you how healthy it is, what your cash runway looks like, and any areas where you may be bleeding money.
Profit & loss
Somewhat of a combination of much of these statements, looking at your overall profit or loss can help give you a broader picture of the performance of your business. This moves you outside of specific sales or costs and allows you to truly understand if your business is profitable.
What to look for in your plan vs actual review
Like we said before, strictly comparing your numbers isn’t enough. You need to have context to fully understand what any differences between actual results and your forecasts really mean. To help guide your review process, these are the primary elements you should be looking for.
As we explored in our sales and expenses examples, a positive variance is any situation where you outperformed what you planned. This can be an increase in sales, units sold, a decrease in expenses, or an influx of cash flow.
Just keep in mind that depending on which statements your viewing, a positive variance can represent optimized performance instead of an increase. The clearest example of this is a decrease in expenses.
The opposite of positive variance, a negative variance is any case where you underperformed compared to your projected plan. This can be a decrease in sales, units sold, cash flow, or an increase in expenses. Just like positive variance, this can be flipped into an increase depending on the statement you’re looking at with an increase in expenses being the most obvious example.
Possibly the most important aspect of what you should be looking for is overall customer interest. This element spurs discussion, exploration, and defined context for any variance found between your plan and actual results.
This isn’t a straightforward numerical metric and is relatively complicated to define. To successfully understand how customer’s are reacting it’s best to approach analysis with specific initiatives in mind.
Did you start a new advertising initiative? Did you change your pricing model or offer a discount? Maybe you introduced a new product line or feature?
Starting with what you executed, adapted or changed and looking at your expectations versus reality can provide keen insight into how well you actually know your audience. It can also ensure that any successful strategy or negative results are addressed quickly and help you adjust expectations moving forward.
Conducting a regular plan vs actual review meeting is crucial
If it wasn’t clear throughout this article, a plan vs actual analysis must be done regularly. It’s worthless to do it once and expect positive results or a successful management strategy to emerge. Typically, you’ll do this once a month so that your forecasts for the following month will be more accurate, but during times of growth or in a crisis it may be necessary to do it more often.
To make this review process more efficient and easy to do, you’ll need to build out spreadsheets with specific equations and manually add up-to-date accounting information. You can get a headstart on building your own data sheets with our sales forecast and balance sheet templates. Or if you want a simpler solution that you can directly connect to your accounting software, you may want to try out LivePlan.
LivePlan helps you easily forecast and compare results with automatic financials, and simplifies comparing your plan to actual by housing it all under one platform. But no matter which option you choose, either manually or with a tool like LivePlan, this is a process you should begin implementing as soon as possible. It will help you take a deeper look at your results, more accurately predict performance and better manage your business.
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