Budget vs Actual: Running a Monthly Review That Changes Decisions
- The layout
- Split gross profit into volume and margin
- Explain the whole gap
- Turning each variance into a question
- Rules that keep the review useful
- How the budget should be built for this to work
- Where this fits
A budget-versus-actual review compares what you planned for the month with what happened, line by line, and explains the difference. Done well it takes an hour and tells you which one or two things to change next month. Done badly it becomes a table of red numbers that everyone looks at and nobody acts on.
The difference between the two is almost entirely in how the gap is broken down.
The layout
Five columns are enough: the line, the budget, the actual, the variance in rupees, and the variance as a percentage. Show favourable variances as positive and adverse ones as negative, whatever the line, so a glance down the column tells you which way things went.
A distributor of kitchen appliances, one month, in ₹ lakh:
| Line | Budget | Actual | Variance |
|---|---|---|---|
| Revenue | 20.00 | 18.00 | (2.00) |
| Cost of goods sold | 12.00 | 11.34 | 0.66 |
| Gross profit | 8.00 | 6.66 | (1.34) |
| Salaries | 3.00 | 3.10 | (0.10) |
| Rent | 1.00 | 1.00 | 0.00 |
| Marketing | 1.00 | 1.40 | (0.40) |
| Other overheads | 0.80 | 0.75 | 0.05 |
| Operating profit | 2.20 | 0.41 | (1.79) |
Operating profit came in at under a fifth of plan. The first instinct is to look at the cost of goods sold line, which shows a favourable ₹0.66 lakh. That is misleading, and it is the most common mistake in these reviews.
Split gross profit into volume and margin
Cost of goods sold was lower because fewer goods were sold, not because buying got cheaper. To see what really happened, break the ₹1.34 lakh gross profit shortfall into two parts.
Volume effect: the revenue shortfall at the budgeted gross margin. Budgeted margin was 8 ÷ 20 = 40%. The shortfall of ₹2.00 lakh × 40% = ₹0.80 lakh adverse.
Margin effect: the change in margin on the sales you actually made. Actual margin was 6.66 ÷ 18 = 37%, three points below plan. ₹18.00 lakh × (37% − 40%) = ₹0.54 lakh adverse.
Together: 0.80 + 0.54 = 1.34. It reconciles.
Now the story is clear. Sales were 10% short, which cost ₹80,000, and the sales that were made earned three points less margin, which cost another ₹54,000. The favourable cost line was an illusion created by the volume shortfall.
Explain the whole gap
| Cause | ₹ lakh |
|---|---|
| Lower sales volume | (0.80) |
| Lower gross margin | (0.54) |
| Marketing overspend | (0.40) |
| Salaries over plan | (0.10) |
| Other overheads under plan | 0.05 |
| Total | (1.79) |
Three items account for almost the whole gap. Those are the only ones worth a conversation.
Turning each variance into a question
Volume, ₹0.80 lakh. Was it fewer orders, smaller orders, or orders that slipped into next month? A delivery held at month-end is timing and will reverse. A lost customer is not.
Margin, ₹0.54 lakh. Three possible causes, each with a different fix: discounting to close sales, a shift in mix towards lower-margin products, or purchase prices that rose without a price increase. The sales register by product usually tells you which in a few minutes.
Marketing, ₹0.40 lakh. An overspend in the same month as a sales shortfall is either a campaign that did not work or one whose results arrive next month. Decide which before approving the next one.
Notice the combination. Marketing went up 40%, sales went down 10% and margin fell. If the extra spend was on a discount-led campaign, all three variances may have the same cause.
Rules that keep the review useful
- Set a materiality threshold. Ignore variances below a set amount or percentage, for example ₹10,000 or 5%. Explaining a ₹5,000 difference in stationery is how reviews lose their audience.
- Compare with a flexed budget where volume drives cost. If sales were 10% short, variable costs should be 10% lower too. Judging them against the original figure rewards everyone for the shortfall.
- Look at year to date as well as the month. A bad month inside a good quarter needs a different response from a third bad month in a row.
- End with actions, not explanations. Each material variance should leave the meeting with an owner and a decision, even if the decision is to wait a month.
- Check the budget itself. If the same line misses every month in the same direction, the budget was wrong. Fix the forecast rather than re-explaining the variance.
How the budget should be built for this to work
A budget built as one annual number divided by twelve produces variances every month that are really seasonality. Build the monthly phasing from last year’s pattern, with known one-offs, such as an annual insurance premium or a festival season, placed in the months they actually fall.
Keep the cash side separate. A month can hit its profit budget and still leave the bank account short, which is what the 13-week cash flow forecast is for.
Where this fits
- Reading the statement the review is based on: how to read a profit and loss statement
- Why margin moves with discounting: what a discount really costs your margin
- Variance analysis in a manufacturing context: standard costing variance analysis
- Tools: cash flow calculator · profit margin calculator