Budget, Forecast and Variance

Build a one-page budget for your business, team or function, keep a rolling forecast next to it, and explain any gap between plan and actual in a three-line comment that names the cause: price, volume, mix, timing or one-off.

Standard method in management accounting (budgets and variance analysis are core content in cost accounting textbooks such as Datar & Rajan, Horngren's Cost Accounting). The case against the fixed annual budget (Beyond Budgeting) is practitioner argument, with a research overview but no settled verdict. Rolling forecasts and the 13-week cash forecast are practitioner tools. Thresholds on this page are rules of thumb.

Use it when:

• You run your own business or a side business and want to know each month whether you are on track.
• You own a cost center or a team budget and report to an owner, a manager or a bank.
• "The numbers look off" and you want to explain why before someone else asks.

Skip it when:

• You first need to know whether one unit of what you sell makes money: use 5.3 Unit Economics Sheet.
• Your worry is running out of cash, not missing a plan: start with 5.4 3-Statement Snapshot and 5.6 Risk & Leverage Checklist.

A budget is a plan written in money: what you expect to sell, at what price, and what it will cost. Comparing it with what happened, and splitting the gap into causes, is core management accounting (Datar & Rajan, 2017). A gap alone only says that something changed. Split into price, volume, mix, timing and one-off, it tells you what to do: price and mix are usually decisions you can repeat or reverse, timing needs no action, and a one-off should not move your forecast.

The fixed annual budget is also contested. Practitioners in the Beyond Budgeting movement argue for dropping it (Hope & Fraser, 2003). A research overview finds two camps with the same starting complaint: one wants a better planning tool, the other drops the budget mainly because of how it is used to judge people (Hansen, Otley & Van der Stede, 2003). Neither camp is shown to get better results. This page takes the middle road: a simple budget as the fixed reference, a rolling forecast as your honest best guess, and never the two confused.

Build revenue from drivers (volume times price), not from a total you hope for. Use your own currency and period.

Strong answer: (illustrative numbers) "Revenue: 250 hours a month × 540 SEK average", with the hours split by service in the driver column. Not: "Revenue: 1.6 million, about the same as last year plus a bit."

The two assumptions this budget depends on most:

Months that differ from the average (seasons, annual invoices):

Illustrative example: the business and all numbers are made up.

The owner of a small cleaning company in a Nordic city budgets February revenue on two services: 200 hours of office cleaning at 500 SEK per hour and 50 hours of move-out cleaning at 700 SEK, 135,000 SEK in total (an average of 540 SEK per hour). Actual February: 185 office hours at 520 SEK (a price increase agreed with two clients in January) and 75 move-out hours at 700 SEK, 148,700 SEK.

Section 3: the plus 13,700 SEK gap splits into price (20 SEK × 185 hours: plus 3,700), volume (10 more hours × 540: plus 5,400) and mix (more of the higher-priced service: plus 4,600). On costs, an annual software license budgeted for March was paid in February (9,000 SEK, timing) and a floor machine needed an unplanned repair (6,000 SEK, one-off). Wage costs for the extra hours are left out for brevity.

Section 4, her comment to the bank contact: "February revenue 148.7k SEK against 135k budget (plus 13.7k). Causes: more hours sold (plus 5.4k), more move-out jobs that pay more per hour (plus 4.6k), new office prices (plus 3.7k). Costs 15k over: the March software license paid early (timing, reverses in March) and a one-off machine repair. Forecast: price effect kept; volume and mix back to plan until March confirms them."