Cumulative Budget vs. Actual

For a company, establishing cumulative and actual budgets helps save cash in money-eating processes and keeps a lid on administrative charges as varied as insurance, office supplies and personnel health care. These blueprints allow the business to remain profitable, even when a bad economy quickly sends commodity prices soaring and imposes significant operating costs on departments and segments.

In budgeting terminology, "cumulative" means the sum of revenue and expense performance amounts a business has anticipated at the reporting date. For example, an organization's first-quarter budget may show the following respective data for revenues and charges: January: $1 million and $750,000; February: $1.2 million and $750,000; and March: $800,000 and $500,000. Consequently, the respective cumulative budget amounts for income and expenses as of March 31 are $3 million, or $1 million plus $1.2 million plus $800,000; and $2 million, or $750,000 plus $750,000 plus $500,000. This calculation yields a net budget surplus of $1 million, or $3 million minus $2 million, at quarter's end.

Actual performance refers to how much a company made over a given period, along with how it fared in the competitive landscape with respect to expense management and revenue growth. Investors and the public, along with competitors and business partners, pay more attention to actual performance than budgeting information. This, typically, is internal confidential data that outsiders can't access, giving more analytical prominence to actual performance numbers. If these numbers remain moribund over a long stretch, they might stir fears of continued instability in corporate operations, and investors might defect to rivals' greener turfs and companies with a healthier financial prognosis.

Comparing cumulative budget data with actual performance information helps top leadership justify the importance of expense shedding and the continuation of specific policies. For example, if senior executives determine that the introduction of a product is successful and brings in more money than expected, they might speed up the phasing-out of money-losing items. The whole conversation about cumulative budget versus actual performance centers on the way an organization continuously reviews its operations, adjusts processes that work, removes those that don't, cuts costs in units that are bleeding money, and props up segments with clear commercial viability.

For a company, setting reasonable budget thresholds and periodically comparing them to actual data are confidence builders. These initiatives help the business weed lingering inefficiencies out of its processes and post operating numbers that match or exceed investors' expectations. The corporation communicates about its periodic operational journey in four distinct statements: a balance sheet, an income statement, a cash flow statement and an equity statement.