Budget vs actual: the monthly report that keeps a plan honest

A plan written in January is a guess. By March the business has started telling you which parts of the guess were right. A budget vs actual report is how you listen: every month it puts what you planned beside what happened, line by line, and shows the gap.

It is the most useful report most small businesses never run. The profit and loss statement tells you what happened. The budget tells you what you expected. Only the comparison tells you whether you understand your own business.

What the report shows

A budget vs actual report has a row for each line of the profit and loss statement and four columns: the plan, the actual figure, the difference in dollars and the difference as a share of the plan. Here is one month for a café that planned on $62,000 of sales:

Profit came in $4,300 under plan. Two lines explain almost all of it: sales were $3,600 short and wages ran $1,500 over. Cost of goods came in under plan, but mostly because sales were lower: fewer coffees sold means fewer beans bought. Rent was exactly as planned, as rent usually is.

Favorable and unfavorable

A variance is favorable when it helps profit and unfavorable when it hurts it. Sales above plan are favorable. Costs above plan are unfavorable. The table above follows that rule: a figure in parentheses is unfavorable and cost the café money, a plain figure is favorable and saved it some. (Accountants write a negative number in parentheses rather than with a minus sign, because it is easier to spot down a column.)

Reading variances this way, rather than as “above or below plan”, matters more than it sounds. “Wages were 7.6% above plan” and “sales were 5.8% below plan” point in different directions but say the same thing: profit was lower than you expected. Put both on one scale and the report reads at a glance.

Which gaps to chase

Not every variance deserves your time. A useful rule is to look into a line only when the gap is large both in dollars and as a percentage. A $40 miss on a $200 line is 20% and does not matter. A $3,000 miss on a $300,000 line is 1% and probably does not either. For a business the size of the café, “more than $1,000 and more than 5%” picks out sales and wages and leaves the rest alone.

For each variance worth chasing, ask three questions.

1. Is it timing or is it real? A supplier’s invoice that landed in June instead of May makes May look good and June look bad, and over the two months nothing changed. A supplier’s price rise will repeat every month from now on.
2. Is it volume or price? Sales can miss because fewer customers came, or because each customer spent less. The fixes are different, so split the two before deciding anything.
3. Was the plan right? Sometimes the actual figure is fine and the budget was wrong. That is worth knowing too, because the same mistake is probably in every month that follows.

Volume and price, worked through

Say the café planned on 6,200 visits at $10.00 each. In fact 6,400 people came in, more than planned, but each spent about 88 cents less. The extra 200 visits were worth $2,000 at the planned $10.00. The lower spend cost $5,600 across 6,400 visits. Together they make the $3,600 shortfall.

That changes the conversation. The café does not have a footfall problem; it has a spending problem. Perhaps a cheaper drink is pulling customers away from the full breakfast, or a new lunch menu is not selling. The fix is on the menu and the counter, not in marketing.

Update the forecast, keep the budget

When a variance is real and will repeat, change the forecast for the months ahead. Do not change the budget.

The budget is the plan you made at the start of the year, and its job is to be a fixed yardstick. The forecast is your best current guess about the rest of the year, and its job is to move. If you overwrite the budget every time reality differs, the report will always show a gap of zero and teach you nothing. Keep both: the budget to measure against, the forecast to plan with.

In practice this means three sets of figures sitting side by side. Months that have closed show actual figures. Months still to come show the latest forecast. The original budget stays underneath for comparison, so the year to date can be read against it.

Look at the year to date

A single month can mislead. Holidays, the weather, a late invoice or one large order can push a month well away from plan without anything having changed. Year-to-date figures smooth that out: a poor month after three good ones may still leave the year on plan, and three small misses in a row are a pattern even if no single month crossed your threshold.

Read the month first to see what happened, then the year to date to see whether it matters.

A monthly routine that takes an hour

1. Close the month. Match the bank, enter the last bills and invoices, and settle the figures. Aim to finish within ten days of month end; a report on stale figures gets ignored.
2. Run budget vs actual for the month and the year to date.
3. Mark the lines over your threshold and write one sentence on each: what happened and why.
4. Sort each one into timing (no action), a fix (an action with a name next to it) or a forecast change (update the months ahead).
5. Share the summary with whoever should know: a business partner, your accountant, or your investors in a monthly update.

Most of the hour goes on steps three and four, which is where it should go. If closing the books takes longer than the review, the bookkeeping process is the thing to fix first.

How Replafin does it

In Replafin the months your books have closed replace the plan as their figures arrive: synced from your accounting software, bank, Stripe or payroll, imported from a file or typed in. The dashboard’s Plan vs actual card sets the year’s recorded months against the plan for the same months, for revenue, gross profit, EBITDA, net income and ending cash.

The Budget vs actual report goes line by line for the month or quarter and the fiscal year to date. It drafts the first sentences of the commentary for you (“Revenue came in at $58,400 against a budget of $62,000...”) and leaves ruled space for the rest. Its variance column is actual minus budget, with favorable results in green and unfavorable in red: the same reading as the parentheses above, shown in color. It downloads as a PDF for the board or as Excel for your accountant.

One difference from the advice above: Replafin’s budget is your plan as it stands, not a frozen copy. Change an assumption and the budget for the months already past changes with it. To keep the original as a yardstick, download the report before you change the plan.