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Financial metrics glossary

Budget vs actual: definition, formula and example

Budget vs actual is the comparison of what a business planned to earn and spend in a period with what it actually earned and spent. The budget variance is the difference on each line, in dollars and as a percentage of budget, marked favourable or unfavourable by its effect on profit.

Updated

Formula

  • Variance = Actual − Budget
  • Variance % = (Actual − Budget) ÷ |Budget| × 100%
  • Revenue above budget is favourable; a cost above budget is unfavourable.

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics, the fictional software company in the Financial Analyst's public sample, against its plan for September 2026:

Line Budget Actual Variance Variance %
Revenue $145,140 $163,156 +$18,015 +12.4% Favourable
Direct costs $42,678 $44,002 +$1,324 +3.1% Unfavourable
Gross profit $102,463 $119,154 +$16,691 +16.3% Favourable
Operating expenses $169,871 $181,300 +$11,429 +6.7% Unfavourable
Operating result −$67,408 −$62,146 +$5,262 +7.8% Favourable
  1. Revenue: $163,156 − $145,140 = +$18,015 (+12.4%), favourable
  2. Operating expenses: $181,300 − $169,871 = +$11,429 (+6.7%), unfavourable

Variance on the operating result: +$5,262

Net of every line, the operating result came in $5,262 better than plan: the revenue variance less the direct-cost and operating-expense variances.

How to read it

  • Read the sign together with the line. Being over budget is good news on revenue and bad news on a cost line, which is why a variance report marks each line favourable or unfavourable instead of relying on the sign.
  • Start from the variance on the bottom line, then find the lines that explain it. Variances offset each other: a result on plan can hide a revenue shortfall covered by spending that has not happened yet.
  • Rank variances by dollars, not by percentage. A large percentage on a small line can look dramatic while barely moving the result.
  • A variance is a question, not an answer. It can come from volume, price, timing — a cost booked a month earlier or later than planned — or from a budget that was set wrong. Timing differences reverse in a later month; the others do not.

Original research: Financial benchmarks for small US public companies, by industry →

Where it shows up in the monthly management report

The report's P&L summary sets revenue, direct costs, gross profit, operating expenses and the operating result against the plan, each difference marked favourable or unfavourable.

It is followed by “What determined the result”: the analyst's explanation of the month, written from the report's own figures; where AI words a sentence, a second, independent AI reviews it before release.

  • Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
  • The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Frequently asked questions

What is the difference between a budget and a forecast?

A budget is the plan set before the period and kept fixed, so performance can be measured against it. A forecast is re-estimated as actual results come in and shows where the period is now expected to end.

Is a positive variance always good?

No. A positive variance means actual is above budget. On revenue or profit that is favourable; on a cost line it means more was spent than planned, which is unfavourable.

What should I do with a large variance?

Find the accounts behind it, then decide whether it is timing that will reverse or a lasting change in volume, price or cost. If it is lasting, update the forecast; the budget stays as the yardstick.