Glossary
What is a budget variance?
A budget variance is the difference between an actual figure and the budget set for it, shown in money and as a percentage of the budget. For revenue, actual above budget is favourable; for costs, actual above budget is adverse.
Also called: Budget vs actual
Variances are usually reviewed line by line each month, against the same month’s budget. A line with no budget has no percentage variance, because there is nothing to divide by. A favourable variance is not always good news, and an adverse one not always bad: lower spending on marketing is favourable on paper and may show up as lower sales later.
Worked example
Example · illustrative figures
| October | Budget | Actual | Variance |
|---|---|---|---|
| Revenue | A$60,000 | A$56,000 | −A$4,000 adverse |
| Subcontractors | A$18,000 | A$16,500 | −A$1,500 favourable |
| Software | A$1,800 | A$3,000 | +A$1,200 adverse |
Revenue fell short of budget (adverse), subcontractors were under budget (favourable for a cost line), and software was well over (adverse). Each variance is a question, not a verdict.
How to read it
Start with the largest adverse variances, because those are where the plan went wrong. Then check whether a favourable variance on costs actually explains an adverse one on revenue: cutting marketing spend is favourable on cost but may show up as lower sales.
Common mistakes
- Treating every variance as a surprise, when seasonal patterns explain most of them.
- Setting a budget once and never updating it, so the comparison grows stale.
- Calling a variance favourable or adverse without knowing the line’s nature: for revenue, above budget is favourable; for costs, above budget is adverse.
How it shows in Nella
Nella reads the overall budget from Xero’s Budget Manager and compares it with each month’s actual figures, line by line. See budget vs actual in Nella and how to compare budget to actual.
Related
Nella provides financial information and education, not accounting or tax advice.
See it on your own numbers
Nella works these figures out from your books every month. Nella Pro is free for 60 days, no card, including the entries you approve posted to your books. After that, Nella Free keeps reading your books, with no time limit.
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