Discovering Value Through Budget vs Actual Analysis: A Guide for Finance and Procurement Professionals

Most finance and procurement professionals are highly familiar with Budget vs Actual (BVA) analysis. And while this is a great tool to manage budgets effectively, its real power lies in using the results of this analysis to surface opportunities and create value.

We’ll explore how to harness the insights gained from BVA to drive positive changes and uncover key insights.

Revealing Opportunities in BVA Insights

Budget vs Actual analysis, or Budget Variance Analysis (a slightly narrower application), isn't just about numbers; it's a strategic tool for exposing opportunities.

Professionals can use BVA insights to identify areas where they can maximize value, optimize processes, and drive down costs. Of course, variance analysis is a whole field unto itself – here, we will focus on strategic, top-line variances and how they can be leveraged to uncover value.

It’s tempting to see positive variances “just” as indicators of room for greater efficiency, while negative variances point to potential cost savings. However, there’s much more to it than that:

Positive variances

Positive variances can also indicate:

1. Opportunity for investment: A positive variance might suggest that a specific project or area performs exceptionally well. This could be an opportunity to invest more resources, expand the project, or replicate its success in other areas.
2. Market opportunities: Positive variances might result from unexpected market conditions. It could indicate increased demand for a product or service, creating opportunities for expansion or diversification.
3. Operational excellence: Positive variances can result from operational excellence or process improvements. It could signal that a department or team works efficiently and delivers high-quality results.

Negative variances

Negative variances also provide value that needs to be unearthed. These variances could mean:

1. What’s Behind Cost Overruns: Negative variances are often associated with cost overruns, but these overruns might be due to various factors like unexpected price hikes in materials or services, which should in turn, be investigated more deeply. Perhaps these materials need to be sourced elsewhere, or there needs to be more diversification in terms of supplier base.
2. Operational Inefficiencies: Negative variances may reveal operational inefficiencies, bottlenecks, or issues within processes. This could be a sign that process improvements or training is needed.
   
   One key way to remove the finance and procurement bottlenecks is to implement a comprehensive and automated platform like PayEm.
3. Market Challenges: Economic downturns or market challenges can lead to negative variances. They might indicate a need for diversification, more market research, or the development of contingency plans.
4. Investment in the Future: It’s also important to bear in mind that negative variances might be a result of investments in long-term projects or research and development. While they may create short-term losses, they can be essential for future growth and innovation.
   
   Beneath the surface of BVA results, a richer story is often being told. For example, a small negative variance might actually be made up of a much bigger issue that’s being offset by a significant positive variance. Obtaining more granularity makes it easier to get to grips with key drivers of variances and make decisions accordingly.
   
   We can see that BVA analysis produces strategic insights that are backed by data and can be used by finance and procurement leaders to drive real value within their organizations.

Other Key Ways to Derive Value from BVA Analysis

Additional ways in which BVA analysis can be utilized for value discovery include:

Revisiting underlying assumptions: BVA identifies discrepancies between initial assumptions and actual results. By revisiting and adjusting these assumptions, organizations can create more accurate budgets and forecasts, reducing uncertainty and enhancing value.

Finding hidden costs: BVA can reveal costs that might not be immediately apparent in the budget. This can include indirect or overhead costs that, when exposed, offer opportunities for cost control and savings.

Enhancing quality and customer satisfaction: BVA may indicate discrepancies in quality or customer satisfaction levels. Identifying areas where customer expectations are not met allows organizations to invest in improvements, ultimately creating value through increased customer loyalty and repeat business.

Employee performance and development: BVA can identify areas where employee performance significantly impacts the budget. Recognizing and rewarding high-performing employees can motivate and retain top talent, adding value to the organization.

Risk management: Organizations can anticipate and mitigate risks by identifying budget variances related to external factors such as market conditions, regulatory changes, or geopolitical events.

Scenario planning: BVA data can be used for scenario planning. Organizations can make informed decisions that maximize value under various circumstances by analyzing different budget scenarios and their outcomes.

How PayEm Enhances BVA Analysis

PayEm’s solution enables finance and procurement leaders to access real-time spend data to ensure that budgets can be managed in real-time.

With customized approval flows, in-platform communication, streamlined payments according to PO budget, and PO usage and budget control, PayEm enables visibility and control – key ingredients in leveraging budgets in general, and BVA analysis specifically.

See PayEm in action, and learn how your company can immediately benefit.

BVA: A Novel Way To Drive Value

Budget vs Actual (BVA) analysis, especially when powered by PayEm, is more than a financial exercise; it's a strategic tool for uncovering opportunities and creating value.

Now, you can truly harness the power of BVA insights to make better decisions, control costs, optimize resource allocation, and unlock value creation.