Budget vs actual: turning your management accounts into decisions

Many SME owners look at their figures with the same question in mind: are we on track, or are we drifting?

That’s what management accounts are for. They give you a regular, up-to-date picture of performance so you can steer the business while there’s still time to change the outcome, rather than discovering the real picture at the end of the year.

Within management accounts, budget vs actual reporting is one of the most useful tools you can use, provided you use it properly.

This is because the point isn’t (for example) to just note that you overspent by £3,000.

The point is to understand why you overspent, whether it’s a one-off, and what you’re going to do about it next month.

That’s the difference between a report that makes you feel briefly informed and one that actually improves control.

What “budget vs actual” really means (and what it should do)

A budget vs actual comparison is exactly what it sounds like: what you expected to happen versus what actually happened. Done well, it highlights overspends, underspends, revenue shortfalls (or outperformance).

But the useful part is the analysis that follows.

When THP’s accountants prepare management accounts, we treat budget vs actuals analysis as a short, disciplined bit of detective work. It allows us to ask ourselves:

1. Is the variance real (or just timing / coding)?
2. If the variance is real, what’s causing it?
3. What action needs to be taken now?

That last step matters. “Interesting” variances are not the same as “important” variances.

The accountant’s way to explain variances (without making it painful)

If you want a simple framework to reuse every month, this section will help you.

1) Look at timing and errors first

Before you do anything else, make sure that you haven’t made a mistake.

Classic examples include when:

• a supplier invoice is posted a month late
• a cost is coded to the wrong place
• an annual bill (insurance, subscriptions) lands in a single month, distorting your figures.

Remember: unless you can explain the numbers, your conclusions will probably be wrong!

2) Look at whether the variance is due to price, volume, or mix

Most meaningful budget vs actual analysis boils down to these three things:

• Price – things cost more than expected, or you charged less than planned.
• Volume – you sold fewer units/hours/covers, or used more inputs than planned.
• Mix – the “mix” of work has changed (you might be doing lower-profit jobs, giving discounts to win work, processing more refunds, or taking on more complex jobs).

Once you find out what’s causing the problem, the next step often becomes obvious.

Three short examples (the kind we see in real businesses)

These examples are deliberately small and easy to grasp. The aim is to show how the thinking works, not to bury you in spreadsheets!

Example 1: “We’re down on sales, but we’re busy”

Let’s say your budget assumed £60,000 revenue and the figures came in at £55,000.

A lot of owners stop there. The better question is: busy doing what?

If your team has been flat out but revenue is down, the issue is often the mix:

• more lower-value work
• more scope creep or write-offs
• a tilt towards clients who take longer to serve for the same fee

The solution in these instances isn’t “sell more”. Instead it might be “tighten scope”, “raise the effective rate”, or “change what you prioritise”.

Example 2: “Materials overspent again”

You have a materials budget of £18,000 that ends up being £21,000.

This can be because of:

• price (suppliers putting up prices, paying extra for rush deliveries, buying ad hoc)
• volume/usage (wasted materials, reworked job, poor ordering)
• mix (higher-specification jobs, inaccurate estimates, variations not billed)

The trick here is to move from noting that the materials budget is overspent to finding the cause(s) behind it. This is the key difference between reporting and control.

Example 3: “Payroll is up, but we didn’t hire anyone”

Your payroll budget of £12,000 comes in at £13,200.

Often, the problem here isn’t headcount. Instead, it’s likely to be volume and timing. For example:

• extra overtime to cover sickness or deadlines
• more use of subcontractors
• pay rises kicking in mid-month
• a bonus or one-off payment that wasn’t budgeted for

Again, you can solve the problem using specific actions. You might find that the solution is firmer rota discipline, better scheduling, or simply updating your budget assumptions to reflect these potential increases.

Why monthly budget vs actual beats quarterly (for most growing SMEs)

Quarterly management accounts can be fine if your business is stable and seasonal.

But if you’re changing prices, hiring, spending on marketing, juggling stock, or your sales pipeline is lumpy, then quarterly management accounts won’t work well for you. By the time you see the problem, you might have lived with it for three months.

Monthly reporting tends to work better because:

• you spot problems while they are still small
• it’s easier to remember what caused a variance last month
• you can adjust quickly, rather than “explaining” a drift after the fact

THP’s management accounts are typically monthly or quarterly, but you can rest assured that we’ll recommend what fits your business best.

A brief clarification: budget vs actual (profit) is not the same as cash

Most budget vs actual reporting is based on your profit and loss. That’s right and normal.

But it doesn’t always match what’s happening in the bank.

You can be on budget for profit and still feel cash pressure because:

• customers are paying later than expected
• you’ve bought stock ahead of a busy period
• VAT, PAYE or annual bills have created a short-term squeeze (especially if you miss HMRC payment deadlines).

This is why good management accounts often look beyond the P&L and include cashflow and balance sheet visibility, not just profit.

Where many businesses go wrong with budget vs actual analysis

The most common problem with budget vs actual analysis isn’t lack of data. It’s stopping too early.

A helpful budget vs actuals review should close with one of these outcomes:

• Fixing the cause (whether it’s pricing, purchasing, staffing or process)
• Updating the budget (if your assumptions were wrong, change the plan)
• Watching a trend (not everything needs action, but some things do need attention)

If you finish the month with “we overspent” and no next step, the report has turned into a post-mortem. Management accounts should be used a steering wheel or, better, a map.

How our management accounts service helps

Our management accounts service includes budget vs actual analysis that highlights overspends, underspends and revenue shortfalls (or outperformance). Our accountants also give you insights into the numbers so you’re not left guessing what they mean.

So, if you’d like a clearer monthly view of performance, and plain-English explanations you can act on, take a look at the service page and get in touch.