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It is all very well identifying variances but the key to successful budget monitoring and control is taking the appropriate action on variances. This checklist will help highlight some of the things you should consider when tackling a budget variance.
Getting Started
Outlined below are some general reasons why a variance might have occurred and what you could do to tackle it. You may also find it useful to talk to your senior colleagues and the finance department about the specific budget controls that are in place for your organization.
1. Have you Checked That your Assumptions and Circumstances are Still Valid?
If these have changed since the time the budget was created then it may account for there being budget variances. If these have changed drastically, you should consider revising your budget to account for their impact. Your senior colleagues may want to stick with the original budget, but at least by drawing up a revised budget for your own reference you will be able to establish if the variances are in line with the changing assumptions and circumstances.
2. Has any of your Data Been Corrupted?
It may seem like an obvious point but check to see that the integrity of any electronic documents is still intact. Technology has a funny way of going wrong when you least expect it or can least explain it! Your budget documents may be wrong and there might not be any variances after all.
3. Have you Correctly Calculated your Variances?
When working with numbers, especially when working under pressure, it is wise to double-check your calculations. As with corrupt data there may not actually be any variance, merely incorrect data.
4. Have you Checked the Controls Around Variance Size?
If the variance is very small, it may not greatly impact on your budget overall and may not be significant enough to spend time investigating. But how small is small enough? Ask your senior colleagues and your finance department about what controls they have around variance size. What size of variance are you all willing to accept?
5. Are you Using ‘Value for Money’ Suppliers?
Perhaps you have changed your suppliers or your existing suppliers have put their prices up? This may mean that you are not getting value for money and materials and equipment are costing more than you had planned. Perhaps a team member did not know that they should be using a particular supplier with agreed prices. Perhaps they used an alternative one which ended up costing more. Any of these things could have caused an overspend in your budget. Check which supplier was used. If you could get better value elsewhere, make sure that you and your team members remember to follow this through in the future. You cannot claw back any money at the moment but at least you can stop the same thing happening again.
6. Do you Have a ‘Commitments’ System?
You or your team members should take existing commitments into account before ordering goods and services. Do you have a way of checking what has already been purchased so that further entries cannot be added to expense codes once they have reached the full budget allocation? If not, it may be worth setting one up. If you or your team members are not kept up to date on where you are against budget at the time of placing the order, there is a danger that in your next budget review you will have a variance.
6. Can you Move Money Around your Budget?
Virement is the transfer of funds from one area of the budget to another. Check to see if you are allowed to do this and what restrictions are placed on it. If you have a variance, you may be able to vire some money from another budget item to deal with the variance and get your budget back on track. You will probably need to get special authorisation for virement. For large virement levels there are likely to be stipulations such as the overspend being a necessary item that could not reasonably have been anticipated at the time of the budget authorisation (e.g. health and safety equipment) and is not indicative of a lack of control around budget monitoring.
7. Have you Been Informed of Staffing Changes?
You should authorize a new member of staff before they can be appointed to your team. If there are not sufficient funds in your staff costs budget, they should not be appointed. Find out if your organization exercises this as a financial control. If not, talk to your senior colleagues about how you can be kept informed of staffing changes and build them into your budgeting process.
8. Have you Correctly Profiled the Timings of Revenues and Expenditures?
Revenues and expenditures happen at different times throughout the year. Have you considered if you have sensibly incorporated this into your budget? Is your team’s activity cyclical, i.e. busier at certain times of the year? Are there any one-off expenditures such as licenses? Are there any irregular expenses that happen at certain points in the year and you have just divided the total amount by the number of time periods within your budget, e.g. dividing the total expense by 12 to get a monthly budget amount? If you have not taken timings into account, you could be throwing your budget off track. The final total for the budget should end up as planned but the time periods that you will be analyzing on a regular basis will be wrong. You will need to find out if you can adjust your budget to make it more accurate and if your senior colleagues will be willing to authorize the changes.
9. Have all Travel, Subsistence and Other Allowances Been Authorized?
You are not setting out to mistrust your team but it is good practice that a tight control is kept on such items. It may be possible that mistakes have been made or expenses have got through unauthorized leading to an overspend. Alternatively, your team members may have forgotten to claim for extra hours that they were scheduled to work or expenses that they have incurred in doing their jobs. Check with your team on this matter and emphasize the importance of timely and accurate claims being made.
10. Can you Carry Forward Unspent Money?
You should check if any amounts not called upon can be carried forward to the next budget period. With a ‘use it or lose it’ approach to budgeting, there is a risk that best value for money will not be achieved if significant purchases are rushed through with any supplier who can process the order before the budget period end. Also, you may have sacrificed other items in your budget in order to accommodate an activity that didn’t go ahead in the current budget period. Is this fair? Talk to your senior colleagues and finance department to find out their view on this.
11. Are Purchase Orders Matched to Invoices?
Does your team or the finance department check all invoices so that expenditure is correctly authorized? If not, you may find that this could cause a variance. It might be worth introducing this as a way of controlling expenditure.
12. Are all Purchase Orders Correctly Authorized?
Purchasing authority should just be delegated to named individuals within your team. Specimen signatures of those authorized to raise orders for goods and service should be monitored. Any changes to the list of authorized signatories should also have been kept up to date.
13. Have you Invoiced for all the Work that you Have Done or Applied for all Funding That you Can?
To be able to account for all income that is due, you must bill for all the work that you have completed. You should coordinate with the finance department to check that the invoicing has been done and it had been done correctly. Alternatively, you may be due funding for your activities. Have you applied for and received all of this?
14. Have you Correctly Controlled your Activities?
If you have incurred expenditure or undertaken work on new products or services not falling within your existing budget categories you are likely to have encountered an overspend.
Alternatively, you may have had difficulty in managing your limited resources so now you have to deal with a variance. You will probably need to cut back on some of your activities and readjust the distribution of funds in your budget from this point onwards. As you did when you first created your budget, you have to reorder your priorities and consider where you can spend less or bring in more revenue. If this simply cannot be done, you may need to reassess your budget. This could be tricky to do, depending on the reason for the variance.
A final Point ...
From the above list, you can see just how important it is to monitor and control your budget on a regular basis. Without this, you will be lucky not to come across any variances at the end of your budget period.
