Budget vs Actuals: How to Analyze Variance
A budget is only useful if you track against it. Here's how to analyze variances, understand what they mean, and take action.
The Goal of BvA Analysis
Budget vs Actuals (BvA) analysis isn't about catching people doing wrong. It's about understanding your business, improving forecasting accuracy, and making better decisions going forward.
You've built a budget. Now the real work begins: using it to understand your business.
Budget vs Actuals analysis compares what you planned to what actually happened. The differences (variances) tell a story. Some are expected, some are noise, and some demand immediate action. The skill is knowing which is which.
What Is Budget vs Actuals?
At its simplest, BvA is a comparison table showing:
- Budget: What you planned to spend or earn
- Actual: What you actually spent or earned
- Variance: The difference (can be shown as $ or %)
Positive variance typically means you spent less than planned (good for expenses) or earned more than planned (good for revenue). Negative variance means the opposite.
Building Your BvA Report
Here's a sample monthly BvA report structure:
Monthly Budget vs Actuals Report
| Category | Budget | Actual | Var ($) | Var (%) | Status |
|---|---|---|---|---|---|
| Revenue | |||||
| Subscription Revenue | $45,000 | $43,200 | ($1,800) | -4.0% | Monitor |
| Services Revenue | $5,000 | $8,500 | $3,500 | +70.0% | Investigate |
| Total Revenue | $50,000 | $51,700 | $1,700 | +3.4% | On Track |
| Expenses | |||||
| Payroll | $65,000 | $62,500 | $2,500 | +3.8% | Timing |
| Marketing | $12,000 | $18,200 | ($6,200) | -51.7% | Action |
| Software & Infra | $8,000 | $7,800 | $200 | +2.5% | On Track |
| Professional Services | $4,000 | $3,500 | $500 | +12.5% | On Track |
| Total Expenses | $89,000 | $92,000 | ($3,000) | -3.4% | Monitor |
| Net Burn | ($39,000) | ($40,300) | ($1,300) | -3.3% | Monitor |
Types of Variances
Not all variances are created equal. Understanding the type of variance helps you respond appropriately.
Timing Variances
Spend or revenue shifted between periods, but total is on track.
Example:
Payroll shows $2,500 under budget because a hire starts next month instead of this month. Annual headcount cost unchanged.
Volume Variances
More or less activity than planned drove the difference.
Example:
Marketing overspent because you ran an extra campaign to capture unexpectedly high demand. More spend → more customers.
Rate Variances
The unit cost was different than expected.
Example:
You budgeted $150K for a new hire but ended up paying $165K to land a stronger candidate. Same hire, higher rate.
True Misses
Genuinely off plan—something went wrong or changed.
Example:
Revenue missed by 20% because your largest customer churned unexpectedly. This requires investigation and action.
What's Material?
Don't waste time explaining small variances. Focus on what matters.
Materiality Thresholds
A variance is material and worth investigating if it exceeds:
Percentage Threshold
±10%
Anything more than 10% off budget warrants explanation.
Absolute Threshold
±$5,000
Even if <10%, dollar amounts above this matter.
Use whichever threshold is greater. Adjust based on your company size— larger companies may use $10K or $25K as the absolute threshold.
The Analysis Process
Here's a systematic approach to BvA analysis:
Start With the Bottom Line
Look at net burn first. Is overall spending on track? If you're within 5% of budget on net burn, you might not need to dig deeper.
Identify Material Variances
Sort by absolute variance and flag anything above your threshold. Typically 3-5 line items will drive most of the variance.
Classify Each Variance
For each material variance, determine: Is this timing, volume, rate, or a true miss? This classification drives your response.
Write Explanations
Document the "why" for each material variance. This is crucial for board reporting and your own learning.
Determine Actions
For each variance, decide: Do we need to change the forecast? Change behavior? Or just note it and move on?
Taking Action on Variances
Different variance types require different responses:
| Variance Type | Typical Action |
|---|---|
| Timing | Note it, but no action needed. Will self-correct. |
| Volume (Favorable) | Celebrate, but investigate if sustainable. Update forecast if recurring. |
| Volume (Unfavorable) | Root cause analysis. Is it one-time or trend? Adjust forecast or cut spend. |
| Rate | Update the budget going forward with the new rate. |
| True Miss | Immediate attention. Understand what went wrong, take corrective action, and update forecast. |
When to Re-Forecast
If you're consistently 15%+ off budget for 2-3 months, your budget isn't useful anymore. Re-forecast to create a realistic baseline. Consider rolling forecasts instead of static annual budgets.
Monthly BvA Meeting
Block 30-60 minutes monthly for BvA review. Include:
- CEO and/or COO
- Finance lead (CFO, Controller, or fractional CFO)
- Department heads for their own sections
The goal: everyone understands the financial picture, explains their variances, and commits to corrective actions where needed.
Common BvA Mistakes
Explaining Every Variance
If you're spending hours explaining $500 variances, your thresholds are too low. Focus on material items only.
Using BvA for Blame
Variance analysis should be about learning, not finger-pointing. Create a safe environment for honest reporting.
Not Updating the Forecast
If you know the budget is wrong, update it. A stale budget makes BvA meaningless. Accurate forecasts beat perfect budgets.
Looking at Monthly Only
Monthly variances can be noisy. Also look at YTD (year-to-date) to see if you're on track overall.
No Action From Insights
BvA without action is just a paper exercise. Every material variance should result in either a decision or an explicit choice to monitor.
Key Takeaways
- 1BvA compares planned vs actual spending to reveal insights
- 2Classify variances: timing, volume, rate, or true miss
- 3Focus only on material variances (>10% or >$5K)
- 4Every variance should result in an action or explicit choice to monitor
- 5Review monthly with stakeholders—make it a habit
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