Budget vs Actual Comparison

What is a budget vs actual comparison?

Budget vs actual comparison (in German: Plan-Ist-Vergleich) denotes the regular comparison, item by item, of the values actually achieved in a period (actual values) with the values planned for it (plan values). It shows the variance in euros and in percent, identifies its causes and thereby provides the basis for measures and for an updated expectation. The term target-actual comparison (Soll-Ist-Vergleich) is often used synonymously. In the narrower sense of cost accounting, this term denotes a comparison in which the plan is first converted to the quantity actually produced. In English, the comparison is called plan vs actual or budget vs actual, and the examination of the variances variance analysis.

A site manager works on the same principle when, every week, he or she lays the construction schedule next to the actual progress of the building. The site manager notes that the roof will come two weeks later and clarifies whether weather, supplier or the schedule itself was the cause.

The yardstick is the approved annual budget (budgeting), that is, the binding plan for the financial year. The actual values come from the monthly closing, the reconciled bookkeeping position of a month, or from the business management evaluation (BWA, Betriebswirtschaftliche Auswertung) of the tax adviser. The comparison is prepared in controlling, and its recipients are management, the advisory board and the shareholders. Participation agreements often provide for it as a fixed part of the reports to investors.

Structure and formula of the budget vs actual comparison

For each item, plan value, actual value and variance stand side by side. The variance is stated in euros and as a percentage of the plan value:

Formula: absolute variance = actual value minus plan value; relative variance = (actual value minus plan value) ÷ plan value × 100%

Reports usually show two perspectives at once: the individual month and the cumulative period since the start of the year (year to date). The individual month shows new developments early. The cumulative view evens out random shifts between months and shows where the year stands overall. A column with the prior-year value is often added. Grouped columns for plan and actual per month are suitable as a chart. The path from planned to actual result is shown by a waterfall chart, in which each variance appears as a bar of its own.

Signs for revenue and costs

The formula actual minus plan produces signs with opposite meanings for revenue and costs. A positive value for revenue is favourable, because more was earned. A positive value for a cost item means additional costs and is unfavourable. Reports resolve this in two ways: they label each variance expressly as favourable or unfavourable, or they reverse the sign for costs so that a positive value always means an improvement in earnings. Both ways are permissible. The logic chosen must be fixed, explained in the report and maintained.

Percentages are meaningful only if the plan value is a sensible reference figure. For plan values close to zero or for figures that change sign, such as a result that turns from profit to loss, only the absolute variance is reported.

Materiality thresholds

Not every variance deserves an explanation. Companies therefore set thresholds from which comment is required. A combination of a percentage and a minimum amount is widespread, so that neither small items with high percentages nor large items with small percentages fill the report. The level depends on company size and the importance of the item.

Variance analysis

A variance is understood only once its cause is named. The analysis breaks it down into partial effects:

• Price variance: the effect of a price different from plan, calculated as the difference between actual price and plan price, multiplied by the actual quantity.
• Volume variance: the effect of a quantity different from plan, calculated as the difference between actual quantity and plan quantity, multiplied by the plan price. Price and volume variance together give the total variance.
• Mix variance: the effect of a different composition, for example when, with an unchanged total quantity, more products with a low margin are sold. It becomes visible when the analysis is split by products or customer groups.
• Timing variance: a revenue or expense arises in a different month from the one planned, for example because a project is accepted later. Timing variances even out over the course of the year and are to be separated from permanent variances.

Each material variance comes with a comment stating the cause, the character (one-off, shifted in time or permanent), the effect on the full year, the measure, the responsible person and the date. The effect on the full year feeds into the forecast.

Budget vs actual comparison, target-actual comparison and forecast

In the narrower sense of cost accounting, the target-actual comparison refines the analysis of volume-dependent costs. It adjusts the plan values to the quantity actually produced (flexible budget) and thus separates the volume effect from the question of whether work was done economically. Suppose 1,000 units are planned with material costs of EUR 50 per unit, that is, EUR 50,000. In fact, 1,200 units are produced for EUR 61,000. The budget vs actual comparison shows additional costs of EUR 11,000. The target costs for 1,200 units are EUR 60,000. Only EUR 1,000 is a genuine consumption variance; EUR 10,000 is explained by the higher quantity.

The forecast pursues a different aim. It does not measure the distance from plan but estimates where the year will probably end. In meaningful reports, plan, actual and forecast stand side by side. The plan remains unchanged, because only a fixed yardstick makes variances comparable over the year.

Rhythm and early-warning function

The comparison is prepared monthly, as soon as the monthly closing or BWA is available. Its usefulness grows with speed: a comparison that arrives six weeks after the end of the month describes a situation to which there is hardly any chance left to react.

As part of an early-warning system, the budget vs actual comparison shows early when revenue and costs diverge permanently. If revenue stays below plan for several months while costs arise as planned, the runway (the number of months for which the available funds last) shortens compared with the plan. It is thus a building block of the legally required early crisis detection.

For investors, planning accuracy, that is, how precisely earlier plans were met, is a mark of credibility. They lay the plans from earlier investor updates next to the later actual figures. Banks often tie financial ratios in loan agreements (covenants) to earnings or liquidity figures whose development the comparison makes continuously visible.

Worked example: budget vs actual comparison with variance analysis

A software company compares March with the budget. Every variance that exceeds both 5% and EUR 10,000 is commented on. The calculation is actual minus plan; for costs, a positive value is unfavourable.

• Revenue: plan EUR 500,000, actual EUR 460,000, variance minus EUR 40,000 or minus 8.0%, unfavourable.
• Personnel: plan EUR 280,000, actual EUR 265,000, variance minus EUR 15,000 or minus 5.4%, favourable.
• Marketing: plan EUR 60,000, actual EUR 78,000, variance plus EUR 18,000 or plus 30.0%, unfavourable.
• Other expenses including depreciation: plan EUR 90,000, actual EUR 92,000, variance plus EUR 2,000 or plus 2.2%, below the threshold.
• EBIT (earnings before interest and taxes): plan 500,000 minus 280,000 minus 60,000 minus 90,000 = EUR 70,000. Actual 460,000 minus 265,000 minus 78,000 minus 92,000 = EUR 25,000. Variance minus EUR 45,000 or minus 64.3%.

With the sign reversed for costs, that is, presented in an earnings-oriented way, the individual variances add up fully to the EBIT variance: minus 40,000 plus 15,000 minus 18,000 minus 2,000 = minus EUR 45,000.

The revenue variance is broken down. Planned were 500 customers with average monthly revenue of EUR 1,000; actually there are 400 customers with an average of EUR 1,150.

• Volume variance: (400 minus 500) × EUR 1,000 = minus EUR 100,000
• Price variance: (EUR 1,150 minus EUR 1,000) × 400 = plus EUR 60,000
• Total: minus 100,000 plus 60,000 = minus EUR 40,000

Behind the total variance are two opposing effects: 100 fewer customers than planned, because fewer new customers were won, but larger contracts in return. The lower personnel costs are favourable only in appearance. They arise because two planned sales employees start only in April, and they explain part of the missing new customers. The additional marketing costs are a timing variance, because a trade fair appearance planned for April was brought forward to March.

Cumulatively since the start of the year, revenue of EUR 1,420,000 is only EUR 20,000 or 1.4% below the plan of EUR 1,440,000. EBIT of EUR 150,000 is EUR 30,000 or 16.7% below the plan of EUR 180,000. Management lowers the forecast for new customer business in the second quarter and leaves the plan unchanged.

Distinctions: budget vs actual, target-actual and actual-actual comparison

• Target-actual comparison: measures the actual against a plan converted to the actual quantity and thereby isolates the efficiency of volume-dependent costs.
• Actual-actual comparison: sets current values against those of the prior year. It shows development but not target achievement.
• Benchmarking: measures one's own metrics against other companies or the industry rather than against one's own plan.

Common mistakes

• Plan overwritten during the year. If the budget is continually adjusted to the actuals, the variances disappear and with them the steering information. New expectations belong in the forecast.
• Annual plan divided by twelve. Without seasonality, hiring dates and price changes in the monthly plan, variances arise that concern only the planning itself.
• Favourable variances not questioned. Lower costs can stem from delayed hires or sales activities that did not take place, whose consequences show up only later in revenue.
• Actual values without accruals. If annual invoices or bonuses are recorded in full in the month of payment, apparent variances arise that tie up time in the analysis.
• Comment without a measure. A description of the variance does not replace the decision on what follows from it, who acts and by when.

Frequently asked questions

How often should a budget vs actual comparison be prepared?

Monthly. Shorter intervals rarely deliver usable insights because accruals are missing; longer ones delay the reaction. Liquidity is in addition often planned and compared weekly.

May the plan be changed during the financial year?

In principle not. New insights flow into the forecast, and the plan remains the yardstick. After far-reaching events, such as a financing round or an acquisition, a formal re-planning is customary. It is resolved and documented, and the original plan is kept for comparison.

From what variance is an explanation necessary?

From a threshold that the company sets itself and records in its reporting guidelines. A rule of thumb is a combination of 5 to 10% of the plan value and a minimum amount that fits the size of the company.

How is a budget vs actual comparison prepared in Excel?

With a table that has one row per item and one column each for plan, actual and variance. If the plan is in column B and the actual in column C, =C2-B2 calculates the absolute and =(C2-B2)/B2 the relative variance. Two further columns mark the variance as favourable or unfavourable and take the comment. The actual values ideally come as an export from the bookkeeping instead of being transferred by hand.

Why do investors pay such close attention to planning accuracy?

Because they base their valuation on the plan for the coming years. A company that has met earlier plans in a traceable way, or explained variances early, also makes its current plan more credible.

The Roemer Capital view

At the start of a financing engagement, Roemer Capital lays the budgets of the past one to two years next to the actual figures, before an investor does. Systematic patterns, such as revenue that regularly arrives later than planned, are addressed openly and taken into account in the financial model for the round. A plan that takes its own history seriously carries the valuation discussions better than an ambitious plan with no connection to the actuals.

For companies that Roemer Capital accompanies as fractional CFO, the budget vs actual comparison is ready every month in Roemer Capital OS. This includes a short explanation of the material variances and their consequences for the full year.