Most small businesses make a budget once a year and look at it again the following year. In between, money leaks: a subscription that doubled in price, a marketing campaign that ran over, a repair nobody planned for. None of it is dramatic on its own, and all of it is invisible until someone puts the budget next to what was actually spent.
That comparison is a budget vs actual variance analysis. It takes ten minutes a month once the habit is set, and it is the fastest way to find out where the money is really going. This guide covers the formulas, how to decide which differences matter, the two kinds of spending that fool people, and a monthly routine. The free Budget vs Actual tool does the arithmetic and builds the spreadsheet.
Key takeaways
- Variance = actual − budget. For costs, a positive variance is an overspend.
- Variance % = variance ÷ budget. It shows how far off the plan a line is, whatever its size.
- Use a threshold, such as 10%, to decide which lines need an explanation, and check the amount too: 40% of a tiny line may not matter.
- Watch for unbudgeted spend: money spent in a category with no budget at all.
- Under budget is not always good news. It may be a real saving, or just spending that has not happened yet.
The two formulas
- Variance = actual − budget
- Variance % = (actual − budget) ÷ budget
For a cost, a positive variance means you spent more than planned, which is unfavourable. A negative variance means you spent less, which is favourable, at least on paper. For income it is the other way round: selling more than budgeted is a favourable variance. Keep costs and income in separate sections so the signs never confuse anyone.
In a spreadsheet, with the budget in B2 and the actual in C2, the variance is =C2-B2 and the variance percentage is =IF(B2=0,"",(C2-B2)/B2). The IF matters: a category with no budget has no percentage, because you cannot divide by zero, and it needs its own label.
A worked example
Here is one month for a small service business, using a 10% threshold: any cost line more than 10% over its budget is flagged.
| Category | Budget | Actual | Variance | Variance % | Status |
|---|---|---|---|---|---|
| Rent | 3,000 | 3,000 | 0 | 0.0% | On plan |
| Payroll | 18,000 | 18,600 | +600 | +3.3% | On plan |
| Marketing | 2,500 | 3,400 | +900 | +36.0% | Over budget |
| Software | 900 | 1,020 | +120 | +13.3% | Over budget |
| Travel | 600 | 350 | −250 | −41.7% | Under budget |
| Professional fees | 800 | 800 | 0 | 0.0% | On plan |
| Office supplies | 300 | 410 | +110 | +36.7% | Over budget |
| Equipment repair | 0 | 450 | +450 | — | Unbudgeted |
| Total | 26,100 | 28,030 | +1,930 | +7.4% | Watch |
Overall the month is 7.4% over, inside the 10% threshold but not on plan, so it is worth watching rather than alarming. The lines tell the real story:
- Marketing is the one that matters: 36% over and 900 in cash. Find out whether it was a deliberate push or a campaign that nobody switched off.
- Software is 13% over. Small in money, but subscription creep repeats every month, so it is worth ten minutes to find the price rise.
- Office supplies is 37% over, but only 110. A high percentage on a small line rarely needs more than a note.
- Payroll is 600 over, but only 3.3%. Inside the threshold; no action beyond knowing why.
- Equipment repair had no budget at all. That is either a one-off, or a sign that a repairs line belongs in next year's budget.
- Travel is 42% under. A real saving, or a trip that moved to next month? Only the notes can say.
Deciding which variances matter
A variance report with twenty red lines gets ignored. Two filters keep it useful:
- A percentage threshold. Ten per cent is a common starting point; tighter for predictable costs like rent and payroll, looser for lumpy ones like repairs.
- A sense of the amount. A line that is both over the threshold and large in money needs an explanation. A line that is over the threshold but tiny needs a glance.
The aim is a short list of lines where someone writes one sentence explaining the difference and one sentence saying what, if anything, happens next.
The two kinds of spending that fool people
Unbudgeted spend is money spent in a category that has no budget line. It never shows as "over budget" in a percentage column, because there is no budget to be over, so it slips past anyone scanning for big percentages. List it separately, every month.
Timing differences make a month look better or worse than it is. An annual insurance premium paid in March makes March look terrible and every other month look fine. A trip postponed from May to June makes May look thrifty. Compare year to date as well as the single month, and note the timing in the notes column so the same question is not asked twice.
A ten-minute monthly routine
- Categorise the month's transactions. Export them from your bank or accounting software and give each a category.
- Put the actuals next to the budget and calculate the variances.
- Explain every line over the threshold, and every unbudgeted line, in one sentence.
- Decide an action for anything that will repeat: cancel it, renegotiate it, or accept it and change the forecast.
- Keep the original budget. If the year has changed, add a reforecast column beside it rather than overwriting the plan.
Run it in the free Budget vs Actual tool
The Budget vs Actual tool follows the same approach:
- Choose a currency and an overspend threshold (10% to start with), then list your categories with their budget, actual spending and notes.
- Import a transactions CSV with date, description, amount and category columns. Each amount is added to its category; a category you have not budgeted for appears as a new line, so it cannot hide.
- Every line is marked on plan, under budget, over budget (beyond your threshold) or unbudgeted, and the whole budget is rated within plan, watch overspend, or materially over budget.
- The top three overspending categories are pulled out, so the conversation starts in the right place.
- Download a formula-driven, Excel-compatible XLSX, or a recap image for a quick monthly update.
Everything runs in your browser; nothing is uploaded. A fast-growing software line is often the first leak you find; our guide to a subscription audit shows how to deal with it, and the 12-Month Cash Flow Forecast shows what the variances mean for your bank balance.
Frequently asked questions
What is a good variance threshold?
Ten per cent is a common default. Use a tighter threshold for steady costs you control closely, and a looser one for irregular costs, so that the lines you flag are the ones worth discussing.
Is a favourable variance always good?
No. Spending less than planned can mean a genuine saving, a delay in spending that will still happen, or something that should have been done and was not, such as maintenance.
Should I change the budget during the year?
Keep the original budget as the record of what you planned. If circumstances change, add a reforecast column next to it and compare actuals with both.
What is the difference between a budget and a forecast?
A budget is the plan you set in advance and measure against. A forecast is your latest best estimate of what will actually happen, updated as you learn more.
How do I handle income in a variance analysis?
Put income in its own section. For income, actual above budget is favourable and actual below budget is unfavourable, the opposite of costs.