MODULE 2

Plan vs Actual Assessment

Week 6-8 (Feb 21-March 11, 2022)

Business Plan Implementation 2 Cristy D. Docdocos,MAMPA

2nd Semester SY 2021-2022 Instructor

Introduction

At this juncture, this module will help you to understand the importance of plan vs actual
assessment. This will also guide you to find out the positive and negative variance of your plan vs actual
business operation that is crucial to the early growth stage of your business. Further, this will help you to
produce adjustments to improve your business process.

Learning Objectives

After studying this topic, the students should be able to:

1. Understand the importance of plan vs actual assessment
2. Compare the positive and negative variance of plan vs actual
3. Produce necessary steps to adjust or improve business process.

Pre-test
1. What is plan vs actual?
2. What are the necessary steps to compare plan vs actual in managing a business?
3. What financial components can plan vs actual help you review?

HOW TO COMPARE 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.

Steps to Compare plan vs actual.

1. 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.

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2. 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.

3. 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.

4. Positive variance vs. negative variance

Positive 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 means
the actual amount is less than the planned amount. To calculate, subtract actual costs
(or expenses) from planned costs.

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 Negative Variance:
 The opposite. When sales or profits are less than planned, 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

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.
5. 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.

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 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 THEN WE NEED TO COMPARE PLAN VS 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.
1. 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.

2. 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.

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 3. 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.
1. Sales
Like in the example above, you can easily compare your revenue and sales to identify specific
buying trends month-to-month.
2. Expenses
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.
3. Cash flow
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.
4. 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.
1. Positive variance
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.
2. Negative variance
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.
3. Customer interest
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.

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 This isn’t a straightforward numerical metric and is relatively complicated to define. To
successfully understand how customers 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.
5 WAYS TO IMPROVE YOUR BUSINESS PROCESSES
1. Reduce costs
When processes are efficient, they take less time to execute, can have fewer steps, and
can make wasteful activities more obvious and therefore easier to eliminate. Making a process
efficient will reduce the cost of running the process itself and will likely reduce the cost of
quality. For example, take a process to convert a customer quote into an order. If you have high-
priced salespeople re-entering orders into your systems, you have an expensive, revenue-
generating person performing a task that can be done by someone with less knowledge of the
sale itself.  Removing or streamlining this process will help the salespeople generate more
opportunities and reduce sales operations costs — an average order entry burden can cost a
four-person sales team $120K to $150K a year over time. Building the process in a disciplined
fashion will improve the quality of the data on the orders, reduce mistakes on product
shipments to the customer, reduce cost of quality and improve shipping times.
2. Improve customer experience and revenue
Effective processes on the revenue side of the business — sales, marketing, R&D, etc. —
drive sales success and improve pricing accuracy and product development. Structured
processes mean you can measure customers throughout their lifecycle and create a consistently
excellent customer experience that the salespeople can use to sell and retain customers.   This
allows sales managers to actively manage the sales process, improve sell-through rates and
control pricing and discounts. It also usually helps reduce the cost of customer acquisition, or at
least more deliberately target investment throughout the sales process.
3. Reduce risk
Consistent processes make for repeatable results. Repeatable results mean less
operating risk. An example of this is a manufacturer’s quality control process. A repeatable,
predictable quality control process will have the same probability of defining defects in every
shift, all the time. A process that varies from shift to shift or person to person will sometimes
result in finding lots of defects and sometimes finding very few, increasing cost of quality and
making it difficult to find the root cause of problems. Since difficult processes make it easier to
identify root causes, they reduce the risk of issues existing in your operations for very long.
4. Make the business easier to manage
Predictable processes that can be measured mean that you can put those processes into
systems, measure them and know their outputs without needing to directly observe them. This
means that good processes allow executives and managers to manage the business without
needing to be involved with every operational detail. It helps leaders get “out of the weeds” to
spend their time working on the business itself.

Guiding principles

The following principles will maximize your chances of success:

 Focus on processes that have a disproportionate impact on either the top or bottom line.
 Process improvement success is ultimately about execution. Choose goals you have a
realistically high chance of achieving based on your organization’s ability to execute.

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  Make sure employees understand the goals. Poor adoption is the top reason process
improvement projects fail. It is difficult to get people to change their habits if they don’t
understand why.
 Make sure it’s possible to measure your progress. Aspirational goals are important, but for
process improvement projects you need to make sure the metrics you establish can actually be
measured on an ongoing basis.
 Get advice. The business environment is changing quickly, and having an independent point of
view will help you choose the right goals and execute them in the most effective, cost-efficient
manner.

5. Up next: Prioritize and execute

The next challenge is setting priorities — figuring out how far to go with process
improvement. No company can change all of its processes at once, and mid-sized companies,
because of their limited resource capacity, need to be laser-focused on those that will generate
the most value.

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.

Read more:
How to Conduct a Monthly Business Plan Review Meeting by Jonah Parson posted last June 21,
2021 https://www.liveplan.com/blog/how-to-run-a-monthly-plan-review-meeting/.

WORKSHEET ACTIVITY

To find out your plan vs actual assessment more efficient and easier to do, you’ll need to build
out spreadsheets with specific equations and manually add up-to-date accounting information.

To compare your plan vs actual business plan implementation, you may use the spreadsheet file
that I have sent to you or/and follow each step provided in the samples. Make and present a report of
the positive and negative variance of your plan vs actual assessment and your adjustment to have a
better management.

References

A. Online References
 Business Plan vs. Actual Means Management by Timothy J Berry, 2021, retrieved last February 2,
2022. https://leanplan.com/plan-vs-actual-example/.
 How Plan Vs Actual Comparison Helps You Manage Your Business by Tim Berry retrieved last
February 2, 2022. https://articles.bplans.com/plan-vs-actual/.
 5 ways to improve your business processes by Steve Ronan, April 1, 2018, retrieved last February
2, 2022. https://www.bizjournals.com/boston/news/2018/04/01/5-ways-to-improve-your-
business-processes.html

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