Procurement

  • 5 min read

What Is Budget Variance, And How Can It Impact Your SaaS Spend?

Rohit Rao

4th January, 2023

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If something looks strange and the numbers don't match, you know it's budget variance. Learn how to account for unexpected changes in your software budget, the causes of budget variance, and how to keep your budget aligned with your company's goals. 

You will also learn how Zluri can help you tackle your budget variances and manage your SaaS budget.

Companies must operate as efficiently as possible while keeping their cash flows stable. But given the current state of the economy, creating and maintaining a budget is getting more complex. 

As interest rates rise, inflation balloons, and margins are under threat; forecasting becomes more critical than ever. Ignoring this reality can lead to substantial errors in your forecasts, causing you to miss opportunities and limit yourself unnecessarily. Budget optimization is essential in such circumstances. It assists you in identifying unnecessary expenditures and sealing expense gaps in your financial accounts.

If you had a perfect budget, you could maximize operational performance. For example, an accurate sales budget would mean that cash flows would be predictable, allowing companies to develop investment strategies that benefit from efficient capital allocation. On the cost side, it could help improve efficiencies by better planning for investments and budgeting for infrastructure improvements.

However, budgets are designed for the future and are fixed. Therefore, one must maintain budgets for economic variations, accounting problems, excessively optimistic or pessimistic sales forecasts, etc.

What is a budget variance? 

A budget variance is a difference between the amount allotted for a given department or project and the amount spent on it. 

Budget variances are a standard part of the financial life of most companies. They can signal that expectations did not align with actual results or that there is a mismatch between expected spending and actual spending on existing products and services. 

Inconsistent budgeting practices can also slow the time it takes to get cash from customers, which leads to unnecessary borrowing from debtors or using cash reserves. Given the unpredictable nature of business, tracking how much is budgeted and what you spend in reality can be difficult. 

There are two types of budget variance - Adverse variance and Positive variance. 

1. Adverse Variance: You may want to ensure that your budget doesn't come up short, but sometimes it's hard to predict. Budget variance significantly impacts the company in terms of lost profits, overspends, and new jobs. Sometimes budgets are off, and you end up with a negative budget variance. This is fine, though, because it's essential to discuss adverse budget variance further because of its damaging and potentially severe consequences for a business.
   
   To help avoid this, you must have accurate estimations of future spending. Also, you should practice good management in order to control costs better and lead your team towards saving money wherever possible.

2. Positive Variance: A budget variance is often created when the company effectively manages its budget. Long-term projects are handled with a buffer, and only when the project nears completion does the company get into an overdraft situation. Some companies use a large margin to guard against unexpected and structural costs, while others come up with their own padding, which makes them more flexible.
   
   There can be several reasons for this, so it's important to investigate them and report on the variance if you need to explain them. If a positive budget variance means you're getting more for your money, then there may be room for improvement elsewhere in your business plan.

Causes of Budget Variance

While organizations consider a variety of variables to develop an appropriate budget, a lot may need to be corrected. Some of the significant causes of budget variations are listed below.

Changing economic conditions

Economic factors cause budget outlays to exceed expected spending. Shifts in commodity prices and labor costs can significantly impact a company's actual versus budget. This results in unexpectedly large expense variances between the estimated expenditure and the numbers at the end of the period. 

Variances might result from modifications to the ordinary course of business when the budget is being created. For instance, a new competitor enters the market, or there might be a shortage that drives up the price of raw materials. Variations may also result from governmental rules and political shifts.

Accounting errors

Another major factor in budget variations is simple human mistakes. The budget may include problems resulting from, for instance, arithmetic mistakes or dependence on old information. This can be due to either underestimating expenses or needing to have all costs adequately recorded in a spreadsheet or listing. 

Reviewing your process regularly to ensure it is working and not causing variances can help you eliminate these issues as quickly as possible.

Operational changes

A significant change in your operational systems could lead to positive or negative budget variances. For example, if you purchase new machinery that makes your workflow more efficient or a turnover in staff improves output, these positive changes could impact your budget.

Internal process modifications, product development initiatives, and employee hiring frequently affect revenue and costs.

Inaccurate expectations

If the management team puts together a budget, they use certain expectations, including estimates and assumptions. When these assumptions are inaccurate, it may cause an unexpected financial loss. 

Some expenses are challenging to predict, particularly if you need access to past data. It can be caused by several factors, including being under or over-staffed, delays in production, or even changing equipment requirements.

Pricing changes

When it comes to budgets, you are advised to be flexible. For example, variances may result if the pricing of your services or fixed assets changes before your budget is finalized and updated, as can happen from time to time. 

Variances may also occur when costs change due to expansion or slower-than-expected revenues. Therefore, it's essential to keep an eye on planned expenditures that diverge from the original budget and make adjustments where necessary.

Employee fraud

In today's turbulent business environment, unforeseen variances may inevitably exceed one's budgeted figures in services or suppliers. While it may be a little harder to predict than some other sources of budget variance, you must learn how to identify them and avoid unnecessary risk and fraud effectively.

Although fraud is less often than some of the other budget variances causes, it nevertheless occurs. Therefore, it's crucial to incorporate checks into your budgeting process to reduce potential hazards.

How Does SaaS Spend Management Software Help You Tackle Budget Variances?

An audit of your whole SaaS landscape by a SaaS spend management solution will provide you with information on your overall spending, the cost of each application, and who is using each one. 

You can also check to see how effectively it is being utilized and whether any other programs possess similar features. By doing this, you can identify areas of SaaS waste and excessive spending and stop them.

A budget variance allows you to determine whether you want to continue using an application or cancel your subscription. With a spend management tool, you can have peace of mind knowing exactly how much money you are spending and what are the upcoming expenditures through an automated forecast of the future costs. A prediction of expenses might help you stay proactive and allocate funds efficiently.

Manage Your SaaS Budget With Zluri

Zluri is a SaaS Management Platform that takes care of your tracking. It recognizes your SaaS ecosystem and suggests more affordable and superior SaaS apps. It does more than manage your SaaS expenditure; it also keeps track of the programs being used and how much they cost.

Unlike spreadsheets, you no longer need to update the pricing plans when they change continually. Zluri updates if a new SaaS tool is added or when there are price adjustments for the current subscriptions. Thus, helping you with implementing a practical budget. 

With Zluri, there are no longer any unexpected renewals, as you are informed before the renewal is due, allowing you plenty of time to decide whether to keep or delete a specific application. Again, helping you mitigate risks and avoid SaaS spend wastage. All the SaaS-related difficulties teasing you until now, like app redundancy, underused applications, shadow IT, and security concerns, can be resolved with Zluri. 

Businesses typically switch to the cloud to save costs associated with on-premise software maintenance. But strangely, if the expense of SaaS is not kept in mind, the ease with which one can acquire it in today's environment can burn a huge hole in your pocket.

So, be smart, and make wiser decisions. Book a demo with us today and understand how Zluri can help you ease your SaaS spend management. 

About the author

Rohit Rao

Rohit works in the Community and Marketing Team of Zluri and is a strong advocate of community led growth.