Let’s look at a simple example of how plan vs. actual analysis works.
For the record, in accounting and financial analysis they call the difference between plan and actual variance. It’s a good word to know. Furthermore, you can have positive or negative variance, as in good variance and bad variance.
- It comes out as a positive number.
- If you sell more than planned, that’s good. If profits are higher than planned, that’s good too. So for sales and profits, variance is actual results less planned results (subtract plan from actual).
- For costs and expenses, spending less than planned is good, so positive variance is when the actual amount is less than the planned amount. To calculate subtract actual costs (or expenses) from planned costs.
- The opposite. When sales or profits are less than plan, that’s bad. You calculate variance on sales and profits by subtracting plan from actual.
- When costs or expenses are more than planned, that’s also bad. Once again, you subtract actual results from the planned results.
I’d like to show you that with a simple example. Let’s start with a beginning sales plan, then look at variance, and explore what it means. This is a simple sales forecast table — a portion, showing just three months — from a standard sales forecast.
Beginning Sales Plan
To set the scene, this illustration shows the sales forecast as the business plan is finished.
Actual Results for Sales
The next illustration shows the actual results for the same company for the first three months of the plan.
The numbers at the end of March show actual sales numbers plus adjustments and course corrections.