Budget vs Actuals: How to Run a Variance Review That Drives Decisions
A budget is only useful when you compare it with actual results every month. A good variance review finds the few differences that matter, explains why they happened and ends with a decision.
- Variance
- The difference between what you budgeted and what actually happened
- Review rhythm
- Monthly, within the first two weeks after month end
- Goal
- Decide what to change, not just explain what happened
15+ years in finance: 100+ financial models built, €40m+ raised for clients, Forbes contributor and lecturer.
Short answer: a variance review compares your budget with actual results, finds the few differences that matter, explains why they happened and ends with a decision. If the meeting ends with only an explanation, it was a reporting exercise, not a management tool.
What you are comparing
Take three columns for each major line of your P&L: budget, actual and variance (actual minus budget). Add a percentage variance so a small line with a big miss does not hide behind a large one.
| Line | Budget | Actual | Variance | Variance % |
|---|---|---|---|---|
| Revenue | A | B | B minus A | (B minus A) / A |
| Gross margin | ||||
| Marketing | ||||
| Payroll |
Remember that a variance is favourable or unfavourable depending on the line: higher revenue is good, higher costs usually are not.
How to run the review
- Close the month first. Do not review numbers that are still moving. Aim to meet within the first two weeks after month end.
- Sort by size. Look at the largest lines and the largest gaps first. Set a simple threshold, for example anything above a certain amount or percentage that you agree in advance.
- Ask why, in this order. Is it timing (a payment moved to next month)? Is it volume (fewer or more sales)? Is it price or rate (a supplier cost changed)? Or was the budget itself unrealistic?
- Separate one-offs from trends. A one-time expense needs a note. A cost that keeps drifting needs action.
- Check cash as well as profit. A budget on target can still hide a cash problem, so look at your receivables and your cash flow position.
- Write down the decision. For each important variance, record one action, one owner and one date.
Common mistakes
- Reviewing too many lines and missing the important ones
- Explaining every variance without deciding anything
- Adjusting the budget every month so there is never a variance to learn from
- Looking only at the P&L and ignoring cash
- Treating the budget as a target to defend rather than a plan to learn from
Keep the budget, add a reforecast
When results move far from the plan, do not quietly rewrite the budget. Keep the original as your reference and build a reforecast for the remaining months. You will see how accurate your planning was and where you now expect to finish the year. For the difference between these planning tools, see financial planning vs budgeting vs forecasting.
A simple rule
If a variance does not change a decision, it does not need a long discussion. If it does, assign an owner and check it again next month. A short review that ends with decisions beats a long one that ends with explanations.
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Related questions
What is a variance in a budget?
A variance is the gap between the budgeted number and the actual number for a line, such as revenue or marketing spend. It can be favourable or unfavourable, depending on the line.
Should I review every line?
No. Start with the largest lines and the largest gaps, in money and in percentage terms. Reviewing everything buries the few variances that matter.
Should I change the budget when it is wrong?
Keep the original budget as the reference and add a reforecast for the rest of the year. That way you can see both how accurate the plan was and where you now expect to land.
