# Spreadsheet skills: modelling actual versus budget

## January 2012

**This month we look at how to structure models effectively and efficiently in order to keep track of actual data versus the original budgeted / forecast information. By Liam Bastick FCMA, managing director with SumProduct.**

**Query**I have to keep track of how actual data compares to the original budget / forecast data and report the variances. Do you have any tips as to how to structure my spreadsheet?

**Advice**This is an area where I have seen modellers get into a mess with alarming regularity. However, with a little thought at the outset, the OFFSET function (also see April 2009’s article) can prove very useful.

**OFFSET remembered**As a reminder, the syntax for OFFSET is as follows:

OFFSET(Reference,Rows,Columns,[Height],[Width]).

The arguments in square brackets (Height and Width) can be omitted from the formula and will be for the entirety of this article.

In its most basic form, OFFSET(Ref,x,y) will select a reference x rows down (-x would be x rows up) and y rows to the right (-y would be y rows to the left) of the reference Ref.

To assist with this month’s topic, please feel free to download the attached Excel file (239KB).

**Setting up the original budget / forecast data**This can simply be typed in, but given the what if analysis demanded of most finance professionals these days, I would be tempted to set it up in a scenario table, viz.

Setting up a scenario table

This method allows for various scenarios to be modelled easily with a different set of input data inserted into each column (from column L onwards in this illustration). A selector (cell J11 in the figure above) is used to select the active scenario, which may be highlighted using conditional formatting (see August 2009’s article).

The data used to drive the model is then highlighted in column J (here, emphasised in yellow) using the following formula for cell J14 for example:

=OFFSET(K14,,$J$11)

In other words, this formula looks up data x columns to the right of column K, where x is specified as the value input in cell J11 (here, this value is 4 so column O’s data is selected).

Clearly, using a columnar approach here makes it very straightforward to set the various scenarios out. However, most financial models are displayed with dates going from left to right across columns rather than down the page using rows. This requires us to transpose the data, and again we may use OFFSET to ‘flip’ the data:

Transposing the data

Here, the period numbers specified in row 31 make it easy for us to transpose the data. For example, the formula in cell L34 would be:

=OFFSET($J$13,L$31,)

ie insert the data x rows down from cell J13 in the first graphic, where x is again specified as the value input in cell J11.

Take care, however, if using an amount followed by growth rates approach for forecast / budget data. The amounts using these examples should be as follows:

Calculating the budget / forecast data

The correct formula here is:

=IF(L$31=1,L$34,K36*(1+L$34))

for cell L36 (say), ie if it is the first period take the amount, otherwise take the amount calculated in the preceding period and multiply it by (1 + growth rate specified in the current period not the next period).

**Including actual data**When actual data is input into a model, it frequently replaces the original information and therefore management loses the ability to see how accurate forecasts were originally and how budgeting may be improved.

One way round this would be to simply have 'actuals' as one of the scenarios so that all forecasts are retained. This is often all that is required, and if so, simply do that.

However, often we may wish to undertake variance analysis by comparing actual data with the original budgeted information. In this case, I would suggest the following approach.

Comparing actual data with the original budgeted information

Rows 9 to 13 of this illustration simply reiterate the calculations already detailed above regarding the original forecasting.

Note row 18 however: this is where actual data is added instead. In my example, I simply use hard coded inputs for my data, but it only requires a simple variation to this methodology to revise growth rates, etc.

Using my logic, we simply use actual data where it is available; otherwise we fall back on the original data and calculations. This is achieved by the formula in row 23 in my example, which is (for cell L23):

=IF(L$18<>"",L$18,IF(L$3=1,L$11,K23*(1+L$11))),

ie, if there is data in the corresponding cell in row 18 use it; if not, if it is the first period take the original input value, otherwise simply inflate the prior period amount by (1 + growth rate for that period). It may include a nested IF statement, but it is still a relatively simple and straightforward calculation.

**Presentation of the outputs**Performing the calculations is only half of the battle. Modellers often have difficulty comparing the original outputs with the reforecast counterparts in an effective and efficient manner. If sufficient, the following would be relatively straightforward:

Comparing actual data with the original budgeted information

This is very easy to put together, but alas, more often than not, the following presentation is required by senior management instead:

Typical variance analysis output

Seem familiar? I have been a model reviewer for many a year and seen this type of output on a regular basis. Many senior management teams like it this way and it is not my role to challenge the status quo – well, at least not on this forum anyway!

The problem with this layout, however, is that it lends itself to promoting poor practice. Models constructed in this way require a large number of unique formulae across a row, which in turn slows down model construction and increases the potential for mistakes, such as referencing errors.

If you have to use this layout, creating the simple summary elsewhere (maybe on an input page),

Interim calculation

inserting two additional lines on the output sheet and using the OFFSET function once more may make your potential troubles a thing of the past, viz*.*

Revised outputs

The interim calculation is straightforward, summarising the original calculations, the revised calculations and the difference (variance) between them.

Looking at the attached Excel file, you will see that each row of the revised output example contains only one unique formula copied across, making it easy to edit, extend and review. This is achieved by adding two rows:

Selector (row 7): identifies whether the column should be reporting the budget information, the actual data or the variance. The equation used makes use of the MOD(number,divisor) function (see November 2011’s article):

=MOD(L$4,List_Depth)+IF(MOD(L$4,List_Depth)=0,List_Depth,0),

List_Depth is the number of selections (Budget, Act / Ref’cast, Variance) permissible – in this case three. =MOD(L$4,List_Depth) takes the counter and converts each one to 1, 2 and 0 (ie the remainder upon dividing the counter by three). The remainder of the calculation, +IF(MOD(L$4,List_Depth)=0,List_Depth,0), simply forces a 0 to 3 instead, so that the Selector gives the values 1, 2 and 3 alternately.

Year No. (row 8): simply notes which year the column is reporting using the formula: =ROUNDUP(L$4/List_Depth,0), ie the year increases the period after the counter is a multiple of three (in this example). Using List_Depth as a variable means that this idea can be easily extended to summarise other data such as reforecasts, % differences etc (ie have different periodicities).

In my example, row 13 requires a very simple formula to generate the required outputs:

=OFFSET(BC_Sales_Summary,L$7,L$8).

BC_Sales_Summary is a range name (see October 2011’s article) where BC stands for ‘base cell’ and in my example would be cell K28 in the interim calculation illustration. The reference would then be offset by Selector number of rows (e.g. if the value of Selector were 3 it would reference the Variance row) and by Year No. number of columns (e.g. if the value of Year No. were 2 it would refer to the 2013 data). For example, cell Q13 equals OFFSET(BC_Sales_Summary,3,2), which would refer to the 2013 Variance figure USD840.

Easy!

This idea can be extended very simply using range names for greater transparency. Please see the attached Excel file (239KB) for further details.

If you have a query for the spreadsheet skills section, please feel free to drop Liam a line at liam.bastick@sumproduct.com or visit the SumProduct website.

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