How to investigate unexpected variance in your business budget

You are a small business owner with a solid budget. Great! However, there are unexplained variances in your budget. Oh-oh! It is important that you investigate unexpected variances as quickly and thoroughly as possible. Unfortunately, the unexpected variance will almost never be in your favor and there are a number of troublesome explanations that will require immediate action.

The first thing that you need to nail down is where in the budget the variance is occurring. If your water bill has suddenly gone through the roof you will need to check for a water leak. This will be easier if your utilities are itemized and not just budgeted under the blanket of "utilities". If you do have blanket budget categories you will need to go through each item one by one and determine which item is driving the increased expense.

That's an easy solution. Problems that are more difficult might arise if your variance is in some area such as "inventory". If the inventory expense has suddenly gone up, you might be selling more (which is good) or you might have a problem with employee theft (which is bad). Taking inventory before and after each shift is a good way to ensure that the money for each item sold goes into the cash register and not into employee pockets. It's unfortunate but as a business owner, you need to be aware of the problem of employee theft. Make sure the inventory is justified with the cash receipts in any business where employees are making cash sales.

Another inventory problem is regular theft. If you feel like the unexpected deviations in your business budget are related to theft you might need to install some sort of security system. Make sure that supply rooms are always locked, in-service staff on how to monitor for theft and what to do if they suspect theft, and put in cameras if necessary. Theft is one of the biggest budget busters and it can be hard to track down.

If you are loosing money and you can't figure out where from, consider an audit. You can have a consulting company come in and audit your books for you. Sometimes unexplained losses can result from bad bookkeeping. Sometimes unexplained losses can result form bad book cooking. An audit is the most effective way to determine exactly what is going on in your business. However, if the problem stems from dishonest financial personnel, it will do no good to have your financial people complete the audit. If you are loosing money and it doesn't seem to have an explanation, get outside help. When you read the financial news there are often stories of dishonest people bilking companies for thousands of even millions of dollars. Don't think that any of your employees are beyond reproach.

Sometimes an unexplained variation will have a simple solution. If one of your accounts failed to make a monthly payment that will create chaos in your books. You should build up some cash cushion to protect yourself from going into debt to your creditors in the case that your monthly revenue is not what was projected. Look into to all late payments and talk with the account holders to find out what kind of problems they are facing. If you feel that you are going to lose that account, make adjustments sooner rather than later. In business, it is a good idea to think like an optimist but plan like a pessimist. You never know what kind of storms are going to come your way and you should be prepared for anything.

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Tags: business_finance business_anagement budget variance employee_theft budget_items inventory unexplained_variance unexplained_variation