Budgeting Basics and Beyond

5.13. Control, Evaluation, and Analysis

A management information system (MIS) includes financial information that allows the manager to compare actual results with target figures. It is better to analyze variances "—preferably" monthly. For example, quarterly variance analysis may be too late to give managers the opportunity to correct problems.

A comparison should be made over time between actual profit and budgeted profit. Related useful ratios are actual revenue to budgeted revenue and actual costs to budgeted costs.

The profit expectation of the plan should be compared to prior years' experience as an indicator of reasonableness. For example, it may not be reasonable to project a sales increase for next year of 40 percent when in previous years the sales increase has never exceeded 20 percent. There must be hard evidence (e.g., something in the current year and expected for a future year to justify it) for this dramatic increase.

The projections in the profit plan should be compared to competing companies' experiences. For example, company X will start a new program or project if it earns a rate of return of 30 percent. However, six competing companies have already tried this program or project and either have lost money or earned a return rate below 5 percent. This makes the company's projected 30 percent rate of return questionable unless special or unique reasons to justify it can be shown.

Ratios may be prepared comparing projected performance to historical performance. ...