Tuesday, October 18, 2011

Sales variances and what they mean.

Last time we talked about what steps you should be taking to close out the year with style.  Expanding on the subject of comparing actual results to your budget, today we will talk about sales variances.

It is easy to compare actual sales results with what you had budgeted, the trick is to determine what caused the variance.  Was it bad budget assumptions? (You always want to leave good notes with your budget as to what your assumptions were for sales and expenses).  Was it a change in overall sales levels or a change in the sales mix?  Sales mix means the combination of products or services you are selling.  Most businesses have at least two different products or services they sell and the actual mix may be different from what you assumed when established your budget.  Our first year of business saw our overall revenue exceeding our budget, but the mix was much different that we expected.  We have gotten better every year at estimating our overall revenue and the mix.  It is important to watch this mix as you may have different margins for different products/services.  You need to understand the market potential for all your products and services and determine if your pricing and marketing is adequate.

Doing this analysis is what hones your understanding of your business and improves your ability to budget and to run your company.  The more you understand your industry, your market and your business, the more successsful you will be.

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