Catching trends as they develop
A Plan vs. Actual Cash Flow table for the same sample plan shown in Part 1 of this series would show the variance in cash flow and cash balance and how much can change, in the real world, despite good planning. A company needs to adjust to change by keeping its plan live.
Illustration 1: Plan vs. Actual Cash Flow
You can see in this illustration how much the cash flow changed as the actual sales differed from plan. The company had to make significant adjustments to its short-term credit management in order to compensate for changed plans. It postponed payments of short-term debt on its credit line and planned on additional adjustments with the short-term credit line. This points out the importance of keeping a live plan and making adjustments. The projected cash flow in the revised scenario is acceptable to the bank, if planned in advance.
Tracking variances is the best way of following through to assure implementation and the success of the business plan.
A simple profit and loss example
The starting plan for profit and loss
Following the example in this series of articles, the Planned Profit and Loss illustration shows the gross margin, and sales and marketing expense area of the Profit and Loss table for the sample company, as it stood in the business plan developed in LivePlan.
Illustration 2: Planned Profit and Loss
Actual results for profit and loss
The next illustration shows the actual results recorded in that portion of Profit and Loss table, after the end of March. Looking at Actual Profit and Loss Results, the actual results illustration means little without comparison to the original budget in Illustration 2 above. Note how actual sales, costs, and expenses are different from planned results.
Illustration 3: Actual Profit and Loss Results
Plan vs. actual profit and loss
The following illustration, Planned vs. Actual Profit and Loss, shows the variance in expenses. The actual results are subtracted from the budget numbers, leaving negative numbers when the actual spending was more than budget or when the sales or profits were less than budget.
Illustration 4: Planned vs. Actual Profit and Loss
The illustration shows a portion of the Profit and Loss Variance table. March results showed sales below plan and costs above plan, for a large negative variance. Sales and Marketing expenses were also above plan in March, causing another negative variance. This is a portion of the table.
Variances are calculated differently in different portions of the plan.
- In expense rows, variance becomes the planned amount minus the actual amount. Lower expenses are a positive variance.
- In the profits and sales areas, variance becomes actual amount minus planned amount. In these cases, higher sales are a positive variance.
Unfortunately, many businesses also forget to compare the original to the actual. Especially if business is going well–the operation shows a profit, and cash flow is satisfactory–comparisons with the original budget are made poorly or not at all.