Budgets and budget vs. actual
Building a budget worth comparing against, how variance is calculated, and reviewing it so the conversation is about causes rather than numbers.
How-toFor Business owners, Bookkeepers, Firm staff
Building one
- 1
Start from last year's actuals, not from a blank sheet.
Then adjust for what you know is changing. A budget built from nothing is a wish list.
- 2
Budget at the level you will manage.
Account-level for most businesses. Add dimensions only where someone is genuinely accountable for that slice.
- 3
Spread by month, respecting seasonality.
A twelfth of the year in every month produces variances that are entirely artificial and quickly ignored.
- 4
Budget the lines that matter and leave the rest.
Detailed budgets for immaterial accounts generate noise that buries the signal.
Reviewing variance
Variance is actual less budget. On revenue, positive is favourable; on expenses, negative is. The useful review looks at a small number of large variances and asks why, rather than annotating every line.
- Set a materiality threshold — perhaps 10% and $1,000 — and only discuss variances that cross both.
- Distinguish timing from permanent differences. A bill that arrived late is not an overspend.
- Check whether an unfavourable expense variance is matched by a favourable revenue one — variable costs should move with volume.
- Re-forecast when a variance is structural rather than defending a budget everyone knows is stale.
Common questions
Yes — an original budget and a revised forecast are both useful, and keeping the original visible is what makes the comparison honest.
Yes, if you tag transactions with that dimension consistently. A departmental budget compared against partially-tagged actuals produces a variance that means nothing.
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