Planned vs actual stats: a method for comparative analysis

One of the most efficient tools to analyze operations within a company is plan vs actual analysis (or, plan/fact analysis). The toolset pertinent with this method allows to know how well planned indicators are being achieved, whether your employees defer from their goal, and to what extent they do so, and if so, why.

Let’s take a look at how a plan/actual analysis is done at a manufacturing company. Besides the plan/actual analysis of the budget performance in relation to its revenue/expenditures sections, a discrepancy analysis is performed in order to reveal the factors responsible for the degree of those discrepancies. Moreover, in this analysis we have applied normalization criteria as being factors outside of the CEO’s scope of influence.

Income analysis for the purpose of calculating bonus awards for executive staff

The factors involved are largely dependent on the specifics of a particular company. One of such specific influencing factors could be that a large amount of company products is exported.

Income from exports is defined as multiplication of product price, product quantity, and the currency exchange rate factor.

This analysis utilizes the absolute difference method. We review revenue differentiated by product type and how it is dependent on each of the factors.

The following algorithm is used:
∆Rq = (Qf — Qp) x ERp x PCp;
∆Rer = Qf x (ERf — ERp) x PCp;
∆Rpc = Qf x ERf x (PCf — PCp);

∆Rq, ∆Rer, ∆Rpc means the difference between revenue planned and actual revenue.
Qp, Qf means the planned and actual currency exchange rate;
PCp, PCf means the planned and actual price, respectively.

Figure 1.

Based on the results of the analysis, the company motivation system has been adjusted. The main performance indicator for the management (being revenue) was being affected by a factor that was completely out of range of the scope of what the management was doing. This has turned out to be currency exchange rates.

This specific indicator has been introduced into the management system as a normalization criterion.

While evaluating the results of labor, normalization has been introduced into the motivation system in the sense that a part of the planned information had to be replaced by the actual data.

These normalization criteria have been implemented within the Bonus Awards section.

When calculating the bonuses for the top- and mid-level management staff, the currency rate has been viewed not only as a discrepancy factor for planned vs actual results, but also as a normalizing factor.

Therefore, when revenue nominated in rubles either decreased or increased solely due to volatility of the currency exchange rate, this was not considered to be a result achieved by the sales department.

In order to determine who should be awarded, and to what extent, the indicators have been re-calculated using the actual exchange rate.

Figure 2.

Figure 2 shows that, according to the planned vs actual analysis, the sales income has increased by 5,988,000 rubles. When the results are normalized against the actual exchange rate, we see a drop in revenue by 2,994,000 thousand rubles. This means that there is no reason to award a bonus to the sales manager for Metal Product No. 1.

Expenses analysis to make decisions in Management

This same method was being used to analyze expenses as well. The cost of production has been planned individually for each product type.

During the analysis of causes for the planned vs actual indicator discrepancies, volume and price factors have been defined, as well as the influence of the production structure on the base cost.
This calculation has also utilized normalization criteria to calculate bonus awards.

During calculation, we have taken into account one peculiar fact that in production, some raw material necessary is irreplaceable, being one of a kind. The managers could not possibly influence the price for this component in any way.

The remaining raw material could be replaced by making new deals with different suppliers, different management solutions could be offered.

If the prices for replaceable raw material would lead to a discrepancy in general production cost, the management could and would discover aspects not discovered previously, when the general plan was being drawn.

What has, specifically, led to the change in the production cost?
Ineffective supplier operations? Budgeting errors?
Based on the results of this analysis, a management solution affected the bonus awards of the production managers.

For fixed expenses, the plan/actual analysis has been made against fixed expenses articles. These articles were in fact the factors influencing expenses as a whole, while the price of the unique raw material has been picked as the normalization criterion.

Planned vs actual analysis is used not only for bonuses for the key staff. Such an analysis method also contributes to elaboration of more exact and realistic business plans. This is effective to better ensure that the goals you have reached are the same as goals you have set to reach.

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