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Budget vs Actuals: Budget Variance Analysis & Guide

Learn about budget vs actuals variance analysis & how it helps businesses measure performance. Download our free BvA template to learn more.

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Uri Kogan

March 15, 2022 1 min read

Budget vs Actuals: Budget Variance Analysis &  Guide

Table of contents

Introduction

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 the timing of cash flows, 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. You do not modify budgets for variations — economic conditions, accounting errors, overly optimistic/pessimistic sales assumptions, etc. — as the period plays out. 

This article and the Google Sheets and Microsoft Excel template we’ve included will help anyone involved in FP&A, from accountants to CFOs, master budget vs. actuals reporting. You’ll learn how to calculate it, visualize it, and, most importantly, interpret it. You can download it here and replace the sample data with your own to make the model outputs more relatable. Let’s walk through the workbook step-by-step.

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.

Analyzing Budget vs. Actuals

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 these 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. Budget vs. actuals analysis is the practice of analyzing the magnitude of these deviations and exploring why they happened. When done right, it’s an iterative process, done monthly, that improves budget accuracy and more importantly, allows for quick course correction. 

Calculating Budget vs. Actuals

Our Budget vs. Actuals template is an advanced template for comparing a budget and actuals, only constrained by the limitations of Excel. Get the template.

Comparing plans and actuals effectively on a continuous basis means keeping financial actuals up to date from your accounting system, updated sales wins from the CRM, and potentially other systems as well.

Without integration, the actuals you’re comparing against are always going to be out of date, and the FP&A team will waste many cycles chasing the latest data or reporting inaccurately. With OnPlan, running budget versus actuals analysis with up-to-date data throughout your financial model is fast, and you can continue to use Excel syntax to maintain total flexibility.

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

There are two broad categories of variance: revenue and expense. 

  • Revenue variance occurs when your projected revenue KPIs differ from actual sales realized.
  • Expense variance occurs when the budgeted expense categories differ from what you actually spent. Expense 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 expense variance, there are four expense types that you can analyze: 

  • Fixed overhead 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 expenses can swell, usually as a result of overtime work. Management can rein in these expenditures by streamlining operations to outsource activities not core to the business’ operations.
  • Material expenses are expenses that you may have some degree of control over, but ultimately they are necessities. Actual spend on them is unavoidable should the price of these inputs increase.
  • Manufacturing expenses include indirect manufacturing costs; for example, the depreciation on a factory or property tax. These do not typically change when the volume of activity changes. Like fixed overhead, they will present a marginal variance to the budget.

Calculating and comparing budget vs. actuals of the above 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.

OnPlan Budget vs. Actuals Template, Inputs | Budget Sheet
OnPlan Budget vs. Actuals Template, Inputs | Budget Sheet

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

OnPlan Budget vs. Actuals Template, Variance Calculations sheet
OnPlan Budget vs. Actuals Template, Variance Calculations sheet

How to Read a Budget vs. Actuals Report

Variance table as percentages and absolutes

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. The Budget vs Actuals template lets you adjust the threshold to suit your needs, on the Dashboard tab:

OnPlan Budget vs. Actuals Template, Dashboard
OnPlan Budget vs. Actuals Template, Dashboard

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. 

OnPlan, Budget vs. Actuals Template, Dashboard
OnPlan, Budget vs. Actuals Template, Dashboard

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. 

Every individual or division involved in FP&A has to come together at this point and play the role of detective. 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?

Wrapping up

Understanding the difference between budget and actuals is a handy tool in business planning, management, and review. If appropriately implemented, the advantages are numerous: enhanced risk management due to insight that reduces the difference between budget and actuals; better decision making that can improve returns; and eliminating biases in your forecasts. 

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About Author

Uri Kogan

Uri Kogan leads marketing and go to market strategy at OnPlan. Uri brings experience as a B2B SaaS marketing executive at a number of high-growth companies, including Nuxeo, where he created a new category of Product Asset Management, leading to a 12x ARR exit, and AppZen, where he led AppZen’s entry into the AP market and served as interim CMO. Earlier in his career, Uri led software marketing teams, incubated new services products, executed turnarounds, and led award-winning global supply chain initiatives at HP. Uri holds a B.A. in economics and a B. Music in opera performance from Northwestern University, and an MBA from Kellogg.

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