What is budget versus actual analysis?
Short answer: Budget vs actual analysis compares planned financial or operating results with recorded results for the same period. It is more than subtraction: a useful analysis identifies the driver, separates timing from permanent differences and states the action or forecast consequence.
Comparisons may cover revenue, gross margin, operating expenses, EBITDA, cash, working capital, headcount and operational metrics. Variances can arise from price, volume, product mix, foreign exchange, timing, accounting classification or changed scope. The sign must be interpreted by line item. Revenue below budget is usually unfavorable, while cost below budget may be favorable only if required capability was delivered. A rolling forecast answers what is now expected; budget vs actual preserves accountability to what was approved.
How it works
Use the same entities, accounting policies, currency, calendar and line definitions for budget and actual. Reconcile actuals to closed management accounts and preserve the approved budget baseline. Set materiality thresholds suited to the decision, then decompose significant differences into operational drivers. Label timing items with the period in which they are expected to reverse. Distinguish recurring run-rate changes from one-time effects. Assign owners and actions, update cash and covenant forecasts where needed, and retain a bridge from budget to actual and from actual to the latest full-year outlook.
Amount variance = actual - budget; percentage variance = (actual - budget) / budget
Example
Quarterly revenue budget is 1,000 and actual revenue is 920, so the amount variance is 920 - 1,000 = negative 80, or negative 8%. A delivery worth 50 moved into the next quarter, price was 20 better than planned and underlying volume was 50 lower. The bridge is negative 50 timing + 20 price - 50 volume = negative 80. Payroll is 30 below budget because two revenue-generating roles were vacant. Calling that payroll result favorable without linking it to the volume shortfall would misstate the business effect.
Why it matters
The useful decision is whether a variance is timing, execution or a permanent change in the outlook, and what management will do about it. The board uses the bridge to preserve accountability for the approved plan. Lenders focus on cash, covenants and reporting consequences. Buyers and investors use the history of forecast misses and corrective action to judge management control, funding requirements and the reliability of future projections.
A variance is not an explanation. Flexible budgets may be needed when actual volume differs materially, but they should not overwrite the approved baseline. Percentage variance can be meaningless when the budget is zero or changes sign. Late journals, acquisitions and foreign exchange require explicit treatment. Budget figures are management plans, not accounting-standard measures or guarantees. Public disclosure, lender reporting and board approvals may impose separate rules for revisions and material changes.