Budget vs Actual: A Monthly Review That Keeps a Small Business on Course

In January the owner writes a plan: sales of a certain amount, rent, salaries, a marketing allowance. By March nobody has looked at it. Costs creep, a slow month arrives unnoticed, and at year end the result is a surprise. The plan was not the problem. Nobody compared it with reality. A monthly budget vs actual review is a thirty-minute habit that prevents most year-end surprises.

What a budget is

A budget is a plan in numbers: what you expect to sell and spend in each month of the year. It is not a prediction to be judged on accuracy. It is a reference point. Its use lies in showing, month by month, where reality has moved away from the plan.

Building a simple budget

You do not need a finance team. A spreadsheet with twelve columns will do.

1. Start from last year

List last year's actual figures by month for sales and for each main cost line. If the business is new, use the last few months and your best estimates.

2. Budget sales

Adjust for what you know: expected growth, price changes, seasonality, a new product, a customer lost. Be cautious. An optimistic sales budget makes every later comparison useless.

3. Budget variable costs

Costs that move with sales, such as stock, packaging, shipping and payment fees, are best budgeted as a percentage of sales. If cost of goods was 55% of sales last year, start from that.

4. Budget fixed costs

Rent, salaries, subscriptions, insurance, loan repayments. Enter known amounts and known changes, such as a rent increase in July or a new hire in April.

5. Add the irregular items

Annual licence fees, holiday bonuses, equipment replacement, tax payments. These are the items that cause cash shocks when forgotten. Place them in the month they fall.

6. Check the bottom line

Does the plan produce a profit? Does cash stay positive in every month? If not, adjust the plan now. That is what a budget is for.

Keep it to fifteen or twenty lines. A budget with a hundred lines will not be reviewed.

The monthly review

Within the first week or two after month end, once the books are closed:

Step 1: put the numbers side by side

For each line: budget, actual, difference in currency, difference in percent. Add year-to-date columns as well, because one month can be noisy.

Step 2: find what matters

Do not study every line. Mark those where the difference is large in both percentage and currency. A simple rule: more than 10% and more than an amount that matters to you. A 40% variance on a tiny cost line is not worth a discussion.

Step 3: ask why

For each marked line, find the cause. Variances come in a few types:

• Timing. The expense fell in a different month from the plan. It will even out.
• Volume. You sold more or less, and variable costs moved with it.
• Price. A supplier raised prices, or you discounted.
• One-off. A repair, a bonus, an unusual order.
• Budget error. The plan was unrealistic.
• Loss of control. Spending grew and nobody decided it should.

The last type is what the review exists to catch.

Step 4: decide

For each significant variance, choose:

• Accept. It is timing or a one-off.
• Correct. Renegotiate, cut, reprice or tighten approval.
• Reforecast. The plan was wrong and expectations for the rest of the year should change.

Write the decision and who owns it.

Step 5: update the forecast

Keep the original budget unchanged. Maintain a second column for the latest forecast of the full year: actuals so far plus what you now expect. This answers the question owners really care about, which is where the year will end.

Reading sales and costs together

Costs higher than budget are not automatically bad. If sales were 20% above plan, cost of goods should be about 20% above plan too. Look at variable costs as a percentage of sales:

• Sales up, cost percentage steady: healthy.
• Sales flat, cost percentage up: margin is eroding. Look at supplier prices, discounts and waste.
• Sales down, fixed costs unchanged: profit falls quickly. Decide what to do early.

An example

In April a small distributor budgeted sales of 400 million and achieved 360 million. Cost of goods was budgeted at 55% and came in at 58%. Marketing was budgeted at 12 million and reached 19 million.

• Sales were short because a large order moved to May: timing.
• Cost of goods rose because a supplier increased prices in March and selling prices were not adjusted: act now and reprice.
• Marketing overran because a promotion was extended without approval: tighten the approval rule.

Three variances, three different responses. Without the review, all three would have surfaced months later as "profit is down".

Making it work

• Close the books on time. A review of data that is six weeks old changes nothing.
• Use the same format every month.
• Involve the people who spend. Whoever manages a cost line explains its variance.
• Keep it short. Thirty minutes, the significant items only.
• Follow up. Start each review with last month's decisions.

Budget and cash

Profit and cash are different things. Alongside the profit budget, keep a simple cash plan that shows when money really moves: customers who pay late, stock bought ahead of the season, tax and loan payments. A business can be on budget for profit and still run short of cash.

Tools

A spreadsheet works if someone enters the actuals each month. Bookkeeping software that holds the budget alongside the ledger produces the comparison automatically once transactions are recorded. Polynusa's bookkeeping gives you monthly reports from the same workspace as sales and invoices. See the pricing page.

Summary

Build a one-page budget from last year, with cautious sales and every irregular cost placed in its month. Each month, compare budget with actual, look only at the large differences, find the cause and decide what to do. Keep the original budget fixed, update a forecast beside it, and watch cash as well as profit.

FAQ

Does a very small business need a budget?

Yes, in a simple form. A one-page plan of expected sales and the main cost lines for each month is enough. Its value comes from the monthly comparison, which shows early when costs are drifting or sales are short, while there is still time to respond.

What is a variance in budgeting?

It is the difference between what you planned and what happened for a given line. A favourable variance improves profit, such as higher sales or lower costs than planned. An unfavourable one reduces it. Large variances in either direction deserve an explanation.

Should the budget be changed during the year?

Keep the original budget as a fixed reference, and maintain a separate updated forecast that reflects what you now expect. Comparing actuals with both shows how the year differs from the plan and whether your current expectations are realistic.