Why are we over budget? A simple five-word question. And your boss expects a simple answer. Responding with, "Because we spent more than we budgeted," won't be considered appropriate. To be a successful manager, you need to know the answer to that simple question, and its opposite, "Why are we under budget?" before your boss asks. You have to understand how to track variances and explain what caused the variances.

A variance is "an instance of varying; difference; discrepancy" (Source: Dictionary.com, Random House Unabridged Dictionary). In budgetary terms, it means the difference between the amount of money in your budget and the amount of money you actually spent. Preparation for explaining variances begins as soon as you submit your budget for the next year. No matter how well you analyzed past purchases and anticipated future expenses, your budget will never be 100% accurate. No one can predict the future. If you don't believe me, watch the weather forecast tonight.

Most companies have annual budgets that are broken down by month. The monthly budget is either "flat" or "adjustable." A flat budget means that the annual amount is divided by 12 and distributed evenly across every month. For example, if you have a $600,000 postage budget, flat budgeting would allocate $50,000 to each month. An "adjustable budget" uses past experience to project the spending for each month. If you generally mail more during the first month of the quarter, then you would allocate more money for January, April, July and October. Table 1 illustrates the difference between flat and adjustable budget.

Department and Corporate Budgets

As a support services manager, you probably are responsible for two types of budgets your department's budget and the corporate budget for postage. In both cases, you will have to react to issues caused by actions outside your control.

Your department's budget is divided among direct and allocated expenses. Direct expenses will consist of payroll (including benefits), travel, education, supplies, maintenance, telephones and postage. Allocated expenses include rent, utilities, depreciation and internal service charges (e.g., human resources support).

While you do have certain control over the salaries of your employees, the health benefits and associated costs are managed by another department. Likewise, all allocated expenses are calculated by facilities management, human resources and corporate finance. Generally, you must accept the charges allocated to your department.

The corporate postage budget is handled differently by every company. Some companies allocate all charges to a separate account, while other companies charge back-postage directly to the department creating the mail. In either case, the mail center manager will be contacted to explain any variances.

If departments are able to bypass the mail center when sending out mail, explaining the budget becomes a real challenge. Mail centers cannot direct departments on volumes of mail, nor should they. But you do need to keep controls on measurements. All departments must be required to notify mail services whenever mailings are sent out, regardless of the source.

The 3 Cs Collect,

Calculate and Communicate

Each month, you will receive a report that compares that month's expenses to the budget, as well as the year-to-date (YTD) expenses to the budget. You will be asked to explain any significant variance. Often, the reports will look similar to Figures 1 and 2.

To explain the variances in each line, you will need to use the three Cs collect information, calculate impact, and communicate findings. Collecting information means finding out the assumptions used to create the budget, what the actual expenses were spent on and why there was a difference from the assumptions. It's important to keep your notes from the budgeting process and your monthly reports, as you'll be referring to them every time you go through this exercise. 

In Figures 1 and 2, we discovered the following information: