Budget vs Actuals: Budget Variance Analysis & Guide

Companies draw up budgets before starting any financial reporting period, usually a fiscal or calendar year. The financial plan is informed by all departments and ensures that decision-makers in the organization are all on the same page. 

In a perfect world, budgets would be accurate to a tee. If this were the case, it would mean that companies would max out their operational performance. Why? An accurate sales budget would bring certainty to cash flow timing, allowing a company to improve its liquidity position. On the cost side, it would benefit from efficient capital allocation, maximizing investment returns.

Budgets, however, are forward-looking and static. As the fiscal period plays out, you don’t modify budgets for variations, such as economic conditions, accounting errors, or overly optimistic or pessimistic sales assumptions.

Our guide to budget vs. actual variance analysis and reporting covers how to calculate it, visualize it, and, most importantly, interpret it. Follow along using our budget vs. actuals Excel template. Download it for free and replace the sample data with your own to make the model outputs more relatable.

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Table of contents

• What is budget vs. actuals analysis?
• Budget vs. actual variance formula
• Analyzing budget vs. actuals: Favorable vs. unfavorable variance
• What types of variances in a budget vs. actual report can you analyze?
• Budget vs. actuals report types
• Determining budget vs. actual revenue and cost variance drivers
• Conclusion: Use budget vs. actuals variance analysis to improve strategic finance

What is budget vs. actuals analysis?

Budget vs. actuals is a comparison of two or more sets of data. It’s the variation (difference) between actual amounts and what was planned or budgeted. Variance analysis is the practice of analyzing the magnitude of these deviations and exploring why they happened. Done right, it’s an iterative process that improves budget accuracy and, more importantly, allows for quick course correction.

Budget vs. actual variance formula

There are two formulas you can use to calculate budget vs. actual variance—percentage or dollar variance. 

BvA variance can be calculated as either a percentage or a dollar value, using the following two formulas:

1. Percentage variance formula: (Actual sales or expenditures ÷ Budgeted sales or expenditures) –1
2. Dollar variance formula: Actual sales or expenditures dollar value – Budgeted sales or expenditures value

The first formula allows you to calculate the difference between budget and actuals as a percentage. 

For example, if the budgeted sales amount was $100,000 and the actual revenues were $75,000, then the variance is -25%.

To save you time calculating your budget vs. actual variance, use our budget vs. actual variance analysis template.

Analyzing budget vs. actuals: Favorable vs. unfavorable variance

Static budgets represent a base case scenario that a company uses to benchmark expenses and revenues. As the financial period progresses, financial analysts should look at how the actual data compares with what they have assumed in the expense budget and revenue forecasts. 

The difference between the planned and actual numbers is variance, and it’s crucial to minimize it, especially if you’re a startup or small business.

You can consider the difference between the budget amount and actuals as either favorable or unfavorable. 

For example, if your actual sales fell short of projections or expenses were above the budget, the actual variance amount would be negative and considered “unfavorable.” On the other hand, if actual sales exceeded those planned or expenses were below the budget, the variance would be positive and considered favorable. 

Deviations from a budget will always occur. But a budget vs. actual variance analysis is the practice of analyzing the magnitude of these deviations and exploring why they happened. 

When done right, budget vs. actual analysis is an iterative process, performed monthly, that improves budget accuracy and, more importantly, allows for quick course correction.

What types of variances in a budget vs. actuals report can you analyze?

There are two broad categories of budget variance—revenue and spending variances. 

1. Revenue variances occur when your projected revenue KPIs differ from actual sales realized.
2. Expense or spending variances occur when the budgeted expense categories differ from what you actually spent.

Spending variances are directly related to costs. They can be more easily controlled than sales variances, making it the first port of call for frugal financial managers who want to rein in overspending. 

Within spending variance, there are four expense types you can analyze: 

• Fixed overhead spending includes expenses like rent, utilities, and loan payments. These variances in your budget will be marginal. They are consistent and do not change as revenues increase.
• Labor spending can swell, usually as a result of overtime work. Management can control these expenditures by streamlining operations to outsource activities not core to business operations.
• Material spending includes expenses that you may have some degree of control over, but ultimately they are necessities. Actual spending on them is unavoidable if the price of these inputs increases.
• Manufacturing expenses include indirect manufacturing costs, such as the depreciation on a factory or property tax. These do not typically change when the volume of activity changes. Like fixed overhead, they present a marginal variance to the budget.

Calculating and comparing budget vs. actuals of expense items starts with creating financial statements. The table below represents the budget’s starting point, which gives us an idea of our projected profit or loss for a given period.

The second step in comparing budgets to actuals is integrating the actuals with the budget, as shown below. 

Our template uses a column structure. The budget is compared directly to the actuals for expense and revenue categories pulled from the actuals sheets into the column adjacent to the budget. This approach follows best practice when comparing data by juxtapositioning the values of budgets, forecasts, and actuals in a horizontal layout.

Budget vs. actuals report types

When conducting your budget vs. actual variance analysis, inputting the data into a chart or graph can help you visualize the variance and streamline the reporting process.

Below we explore two different ways to present budget vs. actual variance analysis data, including using OnPlan’s budget vs. actual dashboard. To follow along with these budget vs. actual report examples, use our budget vs. actual spreadsheet template.

1. Variance table as percentages and absolutes

Referring to our template, differences between budget and actuals are reported in relative (percent of sales) and absolute amounts for each line item. This allows you to identify the severity of the difference between budget and actuals with context and substance. 

The use of conditional formatting highlights the calculated differences between budgets and actuals (variance). The conditional formatting structures the data to visualize it and draw meaningful insights.

Not all deviations are equally important. More minor deviations don’t sound an alarm bell, and you should not consider them as more than white noise. Reducing the noise will help you find signals in the output data.

Many companies choose to apply tolerance limits to variance reporting, such as +/-10% or +/- $50,000 in absolute dollar terms. Our budget vs. actuals template lets you adjust the threshold to suit your needs on the Budget vs. Actuals Dashboard tab, as illustrated in the image below.

2. Chart variances with waterfall charts

A waterfall chart diagram is a primary analysis from an actual vs. budget report. The visualization best presents the results in an orderly manner by segregating the effects of expense items into separate categories. See OnPlan’s Budget. vs Actuals Dashboard image below.

From the variance calculations, you know that in relative terms labor costs, manufacturing costs, and distributions were under-budgeted, reducing actual net profit both in absolute terms and as a percentage of sales. But what brings these numbers to life is when you look beyond the variance calculation and examine the revenue and cost drivers.

Determining budget vs. actual revenue and cost variance drivers

To determine the causes of budget vs. actual variance in both revenue and spending, every individual or division involved in FP&A should come together and play the role of detective. 

Finance team members should ask questions like:

• Why were labor costs under-budgeted? 
• Did the company leave itself open to employees taking advantage of overtime? 
• Would it be better if they outsource tasks? 
• Did HR misestimate a changing labor market? 
• Were hiring managers given too much leeway to negotiate higher salaries for new employees? 
• Why did the distributor underquote, and should they consider building a relationship with a new partner next year?

The answers to these questions are good starting points to identify key drivers in revenue or spending variance.

Use budget vs. actuals variance analysis to improve strategic finance

Understanding the difference between budget and actuals is a handy tool in business planning, management, and review. 

If budget vs. actual reporting is appropriately implemented, the advantages are numerous, including: 

• Enhanced risk management due to insight that reduces the difference between budget and actuals 
• Better decision-making that can improve returns
• Eliminating biases in your forecasts

To see budget vs. actual variance analysis and reporting in motion, book an OnPlan demo today.

Sources:

1. https://corporatefinanceinstitute.com/resources/data-science/variance-formula/
2. https://www.investopedia.com/terms/b/budget-variance.asp