Reading a budget variance: favourable, unfavourable, and what to check next
August closes with revenue THB 0.516m below budget and operating expenses THB 12.92k above it. Both are bad news. In the variance column, one is negative and the other positive.
The formula and the sign
Most workbooks apply this one formula to every line, which keeps the variance column easy to calculate and easy to audit.
Where people slip is in the reading. Revenue or profit above budget is favourable. An expense above budget is unfavourable, even though the formula returns a positive number in both cases.
In the example marketing is THB 11.53k over budget. The figure in the table is positive, and it means the plan was overspent.
Some companies flip the sign on expense lines so that positive always means good. That reads well in a meeting, but say so in the column heading: whoever opens the file next has no other way to know which convention it uses.
Amount and percentage, read together
A percentage variance says how far a line is from plan relative to its own size. The amount says how much it moves profit.
A line with a small budget can be far over in percentage terms and still be worth only a few thousand baht. A large line such as cost of sales can miss by a sliver and still be a large sum.
A workable order is to sort the variances by amount, largest first, and explain the top three before anything else.
When a line's budget is zero there is no percentage to calculate. The workbooks in this set show n.a. rather than zero.
Report a margin change in percentage points
Budgeted gross margin is 35.81% and actual is 34.22%. The difference is -1.59 percentage points (pp).
Written with a % sign, the same difference reads as a change relative to the original margin, which is a different number altogether.
The margin for several months together is total profit divided by total revenue, not the average of the monthly margins. A month with heavy sales should count for more than a quiet one.
One-off or run rate
One month's variance does not tell you what to do. Marketing over budget may be a campaign moved from the month before, which will reverse next month. It may also be a new level of spend that stays until year end.
Read the year-to-date variance next to the month. In the example revenue has been below budget every month since January: THB 81.1m to the end of August against a 85.2m budget. That is a lower run rate, not an odd month.
A run-rate variance belongs in the full-year estimate. For a one-off, note the reason and check that the following month really does come back to plan.
A variance shows where, not why
A variance report tells you where the business is off plan and by how much. It does not tell you why. Revenue below budget can come from volume, price or product mix, and the price-volume split comes before any conclusion.
In the example net profit is THB 0.297m below budget. Revenue is short by 0.516m and gross profit by 0.359m, while operating expenses are only THB 12.92k over. The story sits above the gross-profit line, not in overheads.
Next comes an owner and a follow-up date for each issue. The full line-by-line reading order is in the P&L Budget vs Actual guide.
Common questions
What is a percentage variance a percentage of?
Of budget: (Actual − Budget) ÷ Budget. In the example revenue is THB 0.516m short, 4.51% of the budgeted amount. With a zero budget there is no percentage to calculate.
How big does a variance have to be before it needs explaining?
No single number suits every company. Many set both an amount and a percentage threshold and explain only the lines that cross both. A clear threshold keeps the meeting on the items that actually move profit.
Read next
Figures in the articles are synthetic sample data, used to show the method. They are not a real company's results.
