How do you compare budget vs actual?

The short answer

Set each line's actual beside its budget for the same period and take the difference: variance = actual − budget, in money and as a percentage of the budget. Then mark each variance favourable or adverse by what the line is (more revenue is favourable, more cost is adverse) and explain the ones that matter.

Compare the month and the year to date. From the middle of the year, add the full-year outturn: the actual so far plus a forecast of the months left, against the full-year budget.

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Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.

A Brisbane landscaping company's October, line by line against budget

An invented landscaping company, four months into a financial year that starts in July:

October ($)	Actual	Budget	Variance	Effect
Revenue	412,000	380,000	+32,000 (8.4%)	Favourable
Direct costs	236,000	209,000	+27,000 (12.9%)	Adverse
Gross profit	176,000	171,000	+5,000 (2.9%)	Favourable
Overheads	128,000	131,000	−3,000 (2.3%)	Favourable
EBITDA	48,000	40,000	+8,000 (20.0%)	Favourable

Every total is favourable, and yet gross margin is 42.7% against a budgeted 45.0%, 2.3 points down. The extra work was won at a lower margin, or materials cost more than planned. That is the line worth a question.

Favourable or adverse depends on the line, not the sign

Actual minus budget is positive when revenue beats the budget, which is good news, and when a cost overruns, which is not. Reports either turn the sign round for costs or add a column that says favourable or adverse. Choose one and keep to it.

Margins vary in percentage points, never in percent: 42.7% against 45.0% is 2.3 points down, not 5.1% down.
A line budgeted at zero has no percentage variance. Show the amount and say it was not budgeted, rather than an infinite percentage.

Spread the budget the way the business earns and spends

An annual budget divided by twelve makes every variance partly timing: a seasonal business is "behind budget" all winter and "ahead" all summer, and nobody learns anything. Spread each line by month as it really falls:

revenue by season, from last year's months or the order book;
salaries and rent evenly, with pay rises in the month they start;
annual costs such as insurance and the audit the same way the books carry them, in the month they are paid or spread as a prepayment.

The month, the year to date and the outturn answer different questions

Comparison	Answers
The month	Did something go wrong, or right, this month? Noisy: one invoice can swing it.
The year to date	Are we on track? Timing differences cancel out over the months.
The full-year outturn against the full-year budget	Where will the year land if nothing changes?

A board report usually leads with the year to date and uses the month to explain what changed.

Explain the variances that matter, not every one

Set a threshold of both a percentage and an amount, such as 10% and $5,000, and write a sentence for every variance over both, plus any line the board has asked to watch. Most reasons are one of six: volume, price, mix, timing, a one-off, or a budget that was wrong. How to write them: variance commentary.

Magic MIS sets every line against your budget, on the board and in the words

Enter a budget for each financial year on nine lines (revenue, direct costs, employee cost, other operating expenses, other income, depreciation, finance cost, exceptional items and tax) by typing it, pasting it from a spreadsheet, uploading the spreadsheet, or starting from last year's figures plus a percentage. Gross profit, EBITDA, profit and their margins are built from those lines with the engine's own definitions.

On the board, Compare offers the budget: a "vs budget" chip on each card, with a margin's variance in points, the budget as a dashed line on trend charts, and a variance column in comparison tables. The commentary and Where to act set the month against the budget, each budget figure marked as one, and the chat answers questions about it. The board can also project the profit and loss to the year end, at the recent run rate or by season, and set that outturn against the full-year budget when every month is budgeted.

Looking at the budget on the board costs nothing, and a board shared by link never carries it. For one figure without a whole budget, such as a gross margin of at least 35%, set a target instead.

What people ask about budget vs actual

What is a budget vs actual report?

A report that sets each line of the profit and loss, for the month and the year to date, beside the budget for the same period, with the variance and a reason for the ones that matter. It is usually a page of the monthly management report rather than a document of its own.

Is variance actual minus budget, or budget minus actual?

Either, as long as the report says which and marks each variance favourable or adverse. Actual minus budget is the more common, so a positive revenue variance is good news and a positive cost variance is not.

Should the budget be changed during the year?

Most boards keep the approved budget as the measure for the year and show a reforecast beside it, not in its place; otherwise every variance shrinks after the fact. In Magic MIS the projection to the year end is that reforecast, worked from the months on the board, so the budget itself can stay as approved.

What is the difference between budget vs actual and a forecast?

The budget is the plan made before the year began. A forecast is the latest estimate of where the year will land. Budget vs actual measures the past against the plan; the outturn sets the forecast against it.

Set this month against your budget, from the trial balance

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