Forecasting · 2026-07-14 · 7 min read
Written and reviewed by Project Financial Advisor · FCA · CGMA · ACMA — Chartered Accountant
Budget vs Forecast vs Actual: Variance Analysis
The difference between a budget, a forecast and actuals, how to run variance analysis, and why a favourable variance can still signal a problem.
Budget, forecast and actual are three different numbers that people routinely use as if they were one. The confusion matters, because each answers a different question — what we committed to, what we now expect, and what actually happened — and the gaps between them are where the real management information lives. That gap analysis is variance analysis, and it is the core discipline of FP&A.
The three are not interchangeable
A budget is a commitment made at a point in time, and it should stay frozen — that is what makes it a yardstick. A forecast is your best current expectation, and it should change the moment reality does; a forecast that never moves is not a forecast, it is a hope. Actuals are the score. Teams get into trouble when they quietly revise the budget to match the forecast, because then nothing is ever missed and the target has no meaning.
The variance formula
Always label variances F or U rather than positive or negative, because the sign means opposite things on revenue and cost lines. Spending $20k less than budget is a positive number and a favourable variance; earning $20k less is also arithmetic-negative but the labels prevent a reader mistaking one for the other.
| Line | Budget | Actual | Variance | % | F/U |
|---|---|---|---|---|---|
| Revenue | $500,000 | $470,000 | −$30,000 | −6.0% | U |
| Cost of sales | $200,000 | $182,000 | +$18,000 | +9.0% | F |
| Gross profit | $300,000 | $288,000 | −$12,000 | −4.0% | U |
| Payroll | $150,000 | $162,000 | −$12,000 | −8.0% | U |
| Marketing | $60,000 | $41,000 | +$19,000 | +31.7% | F |
| Operating profit | $90,000 | $85,000 | −$5,000 | −5.6% | U |
Why a favourable variance can be bad news
Look at the marketing line: $19,000 under budget, marked favourable. But revenue missed by $30,000. The 'favourable' variance is almost certainly the cause of the 'unfavourable' one — the team underspent on demand generation and the pipeline suffered. This is the single most useful habit in variance analysis: never read a line alone. Underspending on marketing, hiring or maintenance flatters this month and damages the next two.
Reading the three lines together
Plotting all three over time tells the story a single number cannot: where the budget was optimistic, when the forecast was honestly revised, and whether actuals are tracking the revision or still drifting.
The rolling forecast
Best practice is a rolling forecast: each month, drop the completed period and add a new one at the far end, so you always look the same distance ahead rather than losing horizon as the year runs out. Keep the budget frozen beside it as the yardstick. You then report three things every month — actual vs budget (did we hit the commitment), actual vs forecast (is our estimating improving), and the new forecast vs budget (are we still going to land the year).
Fix the assumption, not the output
The point of a variance is the explanation, not the number. When actuals miss, resist patching the output; find the assumption that was wrong and correct it — persistent misses almost always trace to one or two drivers being consistently optimistic. A model built from visible assumptions makes that diagnosis a five-minute job.
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About the author
Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →
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