Budget vs. Actual Variance Analysis

Variance analysis is diagnostic, not descriptive. A report that says revenue was 8% below budget is not analysis. Analysis says why, which team or product drove it, whether it is recoverable, and what it means for the full-year forecast.

Set Up the Right Columns

The base table has five columns: Actual, Budget, Variance (Actual minus Budget), Variance Percent, and a one-line explanation. Add a YTD Actual and YTD Budget pair if the review is mid-year. Do not add a Prior Year column to the variance table — that belongs in a separate trend view. Mixing budget variance and year-over-year in one table confuses the reader.

Materiality Threshold Before You Write

Define a materiality floor before writing any explanations. A reasonable default is the greater of 5% variance or a fixed dollar amount tied to total budget (e.g., 0.5% of monthly revenue budget). Variances below that threshold get no narrative. This discipline keeps the report focused on decisions, not accounting noise.

Decompose Revenue Variances First

Revenue variances decompose into price, volume, and mix. Volume variance equals (actual units minus budgeted units) times budgeted price. Price variance equals (actual price minus budgeted price) times actual units. Mix variance is the residual when segment composition differs from plan. Identify which driver is largest before writing the explanation. A volume miss and a price miss have different remedies.

Expense Variance Categories

Group expense variances into three buckets: timing (the spend happened, just not in this period), volume-driven (spend moved with a revenue or headcount driver), and structural (the cost base is different from plan regardless of volume). Timing variances resolve themselves and need a one-line note. Volume-driven variances need a rate check (is cost per unit in line?). Structural variances require a decision.

Writing the Explanation

Each material line gets one sentence in the format: what happened, why it happened, and whether it is expected to continue. Example: Revenue was 120k below budget due to a three-week delay in a contracted implementation project; the project began in the following period and the shortfall is not expected to recur. Avoid passive voice and avoid blaming external factors without evidence.

Full-Year Reforecast Flag

After completing the variance table, flag any line where the YTD variance is structural and requires a full-year reforecast. Do not carry a known miss forward in the budget without an updated number. A budget that no longer reflects reality is not a management tool.