Budget vs Actual: How to Build the Report and Explain Variances

A budget vs actual report compares what a company planned to earn and spend with what actually happened, line by line, usually every month. For each line:

• Variance is actual minus budget.
• Favorable or unfavorable: revenue or profit above budget is favorable, and costs above budget are unfavorable.
• Which to explain: most companies explain only the variances above a set threshold, such as $10,000 or 10%, and say what they'll do about each one.

The report isn't the point. The point is the decision that follows: what caused the gap, will it repeat, and does the forecast need to change?

This guide covers:

• the variance formula
• what the report should contain
• how to choose which variances to explain
• how to split a revenue miss into price and volume
• how to write commentary a board can act on

It uses one worked month for a SaaS company, and the Excel template does all of it for your own numbers.

Free budget vs actual template

This free Excel template does everything on this page. Enter your monthly budget and your actuals after each close, then pick a month. It calculates:

• the month and year-to-date variance for every line
• whether each variance is favorable or unfavorable
• which lines need explaining
• how much of a subscription revenue miss came from fewer customers and how much from lower revenue per customer

The Commentary tab gives you a ready-made table for the board pack.

It comes pre-filled with the worked example below, so you can see how it works before entering your own numbers.

Download the template (.xlsx)

How to calculate budget variance

Two formulas cover almost everything:

• Variance ($) = Actual − Budget
• Variance (%) = Variance ÷ Budget

Use the absolute value of the budget in the percentage formula. Otherwise a line that's negative in the budget, such as an operating loss, gives a percentage with the wrong sign.

Whether a variance is good or bad depends on the kind of line:

Label every variance F or U in the report. A column of plus and minus signs makes the reader work out the direction line by line, and people get it wrong.

What goes in a budget vs actual report

A useful monthly report has three parts.

1. The drivers. Customers, revenue per customer and headcount, budget and actual. Most variances trace back to one of these, so show them above the P&L.

2. The P&L lines. Revenue by type, cost of revenue, gross profit and margin, operating expenses by category, and operating income. Use the same lines as the budget, at the level the board can follow. Fifteen to twenty lines is enough for most startups.

3. The columns. For each line:

   • budget and actual for the month
   • variance in dollars and percent
   • F or U
   • the same comparison year to date

   Many companies add a full-year forecast column next to the full-year budget, which shows where the year will land.

Cash belongs in a separate report. A 13-week cash flow forecast tracks cash week by week, while budget vs actual tracks the P&L month by month. You need both, because a company can be on budget and still run short of cash.

Worked example: March for a $4 million ARR SaaS company

Take a SaaS company with about $4 million of ARR, similar to the one in our annual operating plan guide. Its plan for March assumed:

• 230 paying customers at $1,500 a month each
• 33 people at a fully loaded cost of $150,000 a year
• a 78% gross margin

Here is March:

Look only at the totals and March seems almost on plan: revenue 1.9% short, operating expenses 1.9% over. The lines tell a different story:

• Subscription revenue missed by $13,800.
• A one-off services project covered half of that miss.
• Payroll was $25,000 under budget, which hid about $35,000 of overspending on marketing, legal fees and software.

Year to date, it's even better hidden. Total operating expenses for January to March are $2,700 under budget, even though March alone was $10,000 over.

Which variances to explain: setting a threshold

Explaining every line buries the important ones. Set a threshold and explain only the variances above it.

A common rule is $10,000 or 10%, whichever is hit first. You need both parts:

• The dollar test catches big lines with small percentages. Payroll's −6.1% is $25,000.
• The percentage test catches small lines going wrong fast. Professional fees doubled.

Set the dollar threshold relative to the size of the business. $10,000 suits a company spending about $500,000 a month. A company spending $5 million a month might use $50,000.

In the example, five lines cross the threshold: subscription revenue, services revenue, payroll, sales and marketing, and professional fees. So do the two totals. Everything else gets no commentary. Those seven lines are the March report.

Revenue lines are the exception. Explain any revenue miss, whatever the threshold says, because revenue drives the rest of the plan.

Splitting a revenue variance into price and volume

A revenue miss has two possible causes: fewer customers than planned (volume), or less revenue per customer (price or mix). The fix is different for each, so split them:

• Volume variance = (actual customers − budget customers) × budget revenue per customer
• Price variance = (actual revenue per customer − budget revenue per customer) × actual customers

The two add up to the total variance.

In the example, the company had 225 customers instead of 230, and average revenue per customer of $1,472 instead of $1,500:

• Volume: (225 − 230) × $1,500 = −$7,500
• Price: ($1,472 − $1,500) × 225 = −$6,300
• Total: −$13,800, which matches the subscription revenue variance

About half the miss is fewer customers and half is discounting. That's two conversations: one with sales about pipeline and churn, and one about who approved the renewal discounts. A single "revenue was 4% short" line would have hidden both.

Timing, one-off or permanent: writing the commentary

For every variance you explain, say what happened and which of three types it is:

• Timing: the money moved between months, and the variance reverses later.
• One-off: it happened once and won't repeat. It doesn't belong in the forecast.
• Permanent: it will continue. The forecast for the rest of the year needs to change.

Here is the March commentary, as it would appear in the board pack:

Each line should take a board member ten seconds to read and should end in an action or "none". If a variance changes the rest of the year, update the forecast, not the budget. The budget stays as the baseline, as we explain in our annual operating plan guide.

Five mistakes in budget vs actual reporting

1. Reading only the totals. Offsetting variances cancel out, as March shows: a $25,000 payroll saving hid about $35,000 of overspending. Always read the lines.
2. Overwriting the budget. Once the budget is replaced with the latest forecast, every variance looks small and nobody can tell whether the company is executing well. Keep the budget fixed, and add a forecast column next to it.
3. Comparing different accounting bases. A budget built on accrual accounting compared with cash-basis actuals produces variances that are just timing noise, such as an annual software bill landing in one month. Close the books on the same basis as the budget. A fractional controller can set that up.
4. Reporting too late. A budget vs actual report delivered five weeks after month-end describes a different company. Aim to close within 10 business days and review within the next few days.
5. Explaining without deciding. "Marketing was over budget because of the conference" is a description. "Remove $18,000 from May" is a decision. Every explained variance needs an action or a clear "none".