A budget usually records what the business approved as targets and resource allocation, while a forecast records what is now most likely. Keeping both allows learning from variance rather than moving the target each month.
Explain the variance before changing the target
Budget sales are SAR 500,000 at 30% margin; actual sales are SAR 520,000 at 24%. Revenue is SAR 20,000 higher but gross profit is about SAR 25,200 below plan, requiring analysis of discount, mix and cost.
How much came from price?
The budget assumes 1,000 units at SAR 100, producing SAR 100,000 revenue. Actual sales are 900 units at SAR 110, producing SAR 99,000. The SAR 1,000 shortfall conceals two movements: a negative SAR 10,000 volume effect at budget price and a positive SAR 9,000 price effect on actual volume. Together they explain the entire variance.
That analysis may justify forecasting higher prices and lower quantities for the remaining year. The original budget remains the approved reference; the forecast describes the current expectation. Overwriting the original plan destroys the ability to see how assumptions changed and who approved them. Retain forecast versions, data dates and explanations for significant revisions.
Higher revenue does not necessarily mean higher profit. Purchase costs may rise faster than selling prices, or maintaining demand may require an expensive campaign. Include contribution and operating costs, then connect the forecast with collection and purchasing dates so the profit plan also reflects its funding needs.
A base and cautious scenario can focus on one decisive uncertainty, such as a shipment date or customer-renewal rate. Identify which decision changes under the scenario: delaying a purchase, reducing expenditure or securing funding. A scenario affecting no action easily becomes an attractive worksheet that management never uses.
Who owns each assumption?
Sales estimates need demand knowledge, purchase costs need supplier information and cash timing needs finance input. One person writing every assumption without review may produce an arithmetically coherent but operationally weak plan. Record each assumption's source, review date and update owner.
When opinions differ, show their effects instead of averaging them into a number nobody owns. Sales may expect growth while operations faces a delivery-capacity limit. The useful question is what investment or change would enable that growth. This identifies constraints before they appear as delays or emergency spending.
An approved plan and an evolving view
Useful comparison uses consistent definitions and periods and decomposes variance into actionable drivers. Sales may beat plan while profit falls due to discount, mix or cost, so total revenue variance is insufficient.
Keep two clearly identified versions
- Freeze the budget version, assumptions and owner.
- Bring actuals onto the same classification and period.
- Explain major variances by volume, price and timing.
- Update the forecast and record decisions without rewriting baseline.
Sources & further reading
Visit the original source to explore the concept and its wider context.
General educational content. Appropriate treatment depends on your business and accounting policies; consult your accounting professional when applying it to business records.
