Budget Reports and Variance: Reading the Monthly Report and Explaining the Gap
Unit 1: Financial Management. Lesson 3 of 60 in CHTM Academy.
On the eighth working day of the month a report appears in your inbox with your cost center at the top. One line is highlighted. Finance wants a written explanation by Friday. This happens every month of your career, and the manager who can read the report and write the explanation in ten minutes is the manager whose budget requests get believed.
What the monthly budget report holds
Five columns, repeated twice: once for the month and once for the year to date.
Account Budget Actual Variance Percent Salaries 48,000 51,600 (3,600) (7.5) Maintenance and repairs 12,000 8,400 3,600 30.0 Purchased maintenance 30,000 30,000 0 0.0 Travel and education 2,000 5,400 (3,400) (170.0) Supplies 1,500 1,350 150 10.0 Total 93,500 96,750 (3,250) (3.5)
Brackets are the hospital's way of writing a negative, and on an expense line a negative variance means you spent more than you were given.
The arithmetic
Variance = actual minus budget. Variance percent = variance / budget x 100. On the salaries line above, 51,600 minus 48,000 is a 3,600 overspend, and 3,600 / 48,000 x 100 is 7.5 percent. Accounting usually asks for a written explanation once a month lands 5 or 10 percent off its budget, so know your hospital's trigger.
Favorable and unfavorable
For an expense, under budget is favorable and over budget is unfavorable. For revenue it is the other way round: more revenue than planned is favorable. Over-expenditure is what draws attention, but a large favorable variance is also a question, because it usually means work did not happen.
Timing variances and real variances
A timing variance is a gap that will close by itself. The contract invoice was due in March and arrived in April, so March looks favorable and April looks terrible, while the year to date is exactly on plan. A real variance does not close: a new position filled early, a part price increase, a vendor rate change, a device failing more often than budgeted. Check the year-to-date column before you write anything, because it separates the two for you. Seasonality and one-time events belong in the same reading: scheduled maintenance clusters in some months, and a single large repair can own a month on its own.
Writing the explanation leadership expects
Three sentences, in one order every time: what, why, and what you will do.
- What: travel and education is 3,400 unfavorable for the month and 1,100 unfavorable year to date.
- Why: two technicians attended the school negotiated into the purchase of the new system, which was scheduled this month rather than spread across the year.
- What you will do: no further school spending is planned before the fourth quarter, so the line returns to plan by year end; the alternative was vendor labor at a higher rate.
Never explain a variance with the word "overspent" and nothing else, and never promise a recovery you cannot show in the numbers.
Forecasting the year end
Divide the year-to-date actual by the months elapsed to get a monthly run rate, multiply by twelve, then adjust for what you know is coming: a contract renewal with an escalation, a vacancy you expect to fill, an irregular part due on its interval. A forecast you carry to leadership in month six is a request for help; the same number discovered in month twelve is a failure.
Budget Reports and Variance: Reading the Monthly Report and Explaining the Gap, explained slowly
A full monthly variance report, read line by line
This is period 6 of a twelve-month fiscal year, so half the year has elapsed. Brackets are negatives, and on an expense line a negative variance means overspending.
---------- Month 6 ---------- ------- Year to date ------- Account Budget Actual Var Pct Budget Actual Var Salaries 48,000 51,600 (3,600) (7.5) 288,000 299,400 (11,400) Overtime 2,000 5,100 (3,100) (155.0) 12,000 24,800 (12,800) Employee benefits 13,500 15,100 (1,600) (11.9) 81,000 87,500 (6,500) Maintenance/repairs 12,000 8,400 3,600 30.0 72,000 58,900 13,100 Purchased maint. 30,000 30,000 0 0.0 180,000 180,000 0 Travel/education 2,000 5,400 (3,400)(170.0) 12,000 13,100 (1,100) Supplies 1,500 1,350 150 10.0 9,000 8,600 400 Total 109,000 116,950 (7,950) (7.3) 654,000 672,300 (18,300)
Which of these is a real variance
Line Reading Real or timing
Salaries over in the month and over year to real: a position was
date by about 4% filled earlier than planned
Overtime double the budget twice over real, and the most
serious line on the page
Employee benefits tracks salaries, because it is a rate real, and follows from
applied to them the two lines above
Maintenance/repairs favorable in the month and 18% favorable timing in part, real in
year to date part: see below
Purchased maint. exactly on budget, as a contract paid neither; verify it was
in equal installments should be invoiced, not assumed
Travel/education wildly over in the month, barely over timing: school seats
year to date negotiated into a purchase
Supplies small and favorable ignore itThe maintenance and repairs line deserves a second look precisely because it is favorable. A department 18 percent under its parts budget at the half year is either buying better or not doing the work. Check the completion rate and the backlog before you report it as good news, because the favorable parts line and the unfavorable overtime line may be the same story: too few people, so scheduled maintenance slipped and the hours that were worked were paid at premium rates.
The written explanation, as leadership should receive it
Salaries, overtime, and benefits: $30,700 unfavorable year to date. The approved second technician position was filled in month two rather than month six, and the vacancy it replaced was covered on overtime for the five months before that. Overtime also carries the coverage for one technician on extended leave. Scheduled maintenance completion has held at target, which is what the overtime bought.
Action. Overtime returns to budget from month seven with the new technician productive, and the leave coverage ends in month nine. The year-end forecast is $1,335,600 against a $1,308,000 annual budget, a 2.1 percent overage carried almost entirely by overtime already incurred. I will report again at month nine before requesting any amendment.
Forecasting the year end from this page
Step Arithmetic Result Year-to-date actual 672,300 672,300 Months elapsed 6 Monthly run rate 672,300 / 6 112,050 Straight projection to twelve months 112,050 x 12 1,344,600 Less overtime correction from month 7 (2,100 x 6) (12,600) Plus known contract escalation in month 9 (900 x 4) 3,600 Adjusted forecast 1,335,600 Annual budget 1,308,000 Forecast variance (27,600)
The straight projection and the adjusted forecast differ by $9,000, and the adjustments are the part leadership can actually act on. State them.
What to memorize
Variance actual minus budget Variance percent variance / budget x 100 Favorable expenses under budget, revenue over budget Unfavorable expenses over budget, revenue under budget Explanation usually required once a line is 5% or 10% off budget Timing variance closes by itself; check the year-to-date column Explanation shape what, why, what you will do Forecast year-to-date actual / months elapsed x 12, then adjust