Finance · Proving to Scaling
Budget, forecast and actuals
You know what your budget, forecast and actuals each do, you build your revenue from capacity, utilisation and rate, and you can explain a variance line by line.
Worth reading first: Reading your P&L
Does this sound familiar?
- We draw up a budget in December, and by March nobody looks at it.
- We adjust the budget every month, and at the end of the year it's spot on.
- We're behind budget, but nobody can say whether it's the price or the hours.
- The revenue in the budget is last year plus ten per cent, because that felt right.
- The bank asks for a projection for next year, and we start from scratch.
Who it's for, and when
For founders who draw up a budget and don't open it again after March, or who adjust it every month until it matches. In Proving, a simple cash forecast is enough; an adopted budget only makes sense once revenue is predictable enough to build a plan on. From Organising onwards you manage your leadership team against the budget and talk through the variances every month.
The model
A business needs three sets of figures side by side, and each does a different job. The budget is your plan for the year. You adopt it once, with your leadership team, and after that it doesn't change. The forecast is what you expect now. You update it as soon as something changes: a client who leaves, a new hire who starts early, ten laptops you need after all. The actuals are what really happened, from your accounts, for each closed month.
You measure the actuals against the budget. If you adjust the budget every month, the bar moves with you and there's never a variance at year end. Then you no longer know whether your plan was any good, and your leadership team learns that a target is negotiable. A change goes in the forecast. You only revise the budget for a change that affects the whole plan, such as an acquisition or losing your biggest client, and even then the old budget stays in place to measure against.
A forecast that runs to 31 December gets shorter as the year goes on. In November you're only looking six weeks ahead, just when you want to know whether you can pay salaries in March. So a rolling forecast always looks twelve months ahead: after each closed month, that month moves into the actuals and a new month is added at the end.
A revenue assumption is only worth something if you can explain it. In a business that sells hours, revenue is capacity times utilisation times rate. Capacity is the hours your people are available after holidays, sickness and training. Utilisation is the share of those hours you bill to clients. Rate is what you get per hour on average, after discounts. If you sell products or subscriptions, it's the number of customers times the average order times how often they buy. With a sum like that, you can say which of the three was off when there's a variance.
The split into budget, forecast and actuals is standard practice in planning and control (FP&A). The rolling forecast: Steve Morlidge and Steve Player, Future Ready (2010). Splitting a revenue variance into volume and rate is classic variance analysis from management accounting.
Budget
Your plan for the year. Adopted once, then read-only. It's the bar you measure against.
Forecast
What you expect now, twelve months ahead. The actuals where you have them, and your best estimate after that. Updated every month.
Actuals
What really happened, from your accounts. For each closed month, for each line of your P&L.
Difference
Actuals minus budget, line by line. For revenue, more is favourable; for costs, more is adverse. Every large difference gets an explanation: what happened, and does it change the forecast?
Pitfalls
A variance on the total only
Profit is €37,000 behind budget. Nobody can do anything with that. Split it by line, and split revenue into volume and rate, and you know who needs to act on it.
Dividing the budget by twelve
In July and December your people work fewer days, and some clients buy quarterly. Spread the year evenly across the months and every summer you'll see a variance that isn't there. Budget by month, with working days and seasonality built in.
Watch and read
Hannah Smolinski explains why you leave the budget alone and keep a rolling forecast next to it, with an example from a service business.
Watch on YouTubeWhat a budget versus actuals report looks like and how to read the differences, asking for each line what happened.
Watch on YouTubeThis one's in Dutch, from the Netherlands Chamber of Commerce (KVK). It explains the terms Dutch accountants and banks use: the exploitatiebegroting is your budget, and the liquiditeitsbegroting is what the app calls Cash.
Watch on YouTubeRead
Future Ready: How to Master Business Forecasting
Steve Morlidge en Steve Player · 2010 · ISBN 9780470747056
On the difference between a target and an expectation, and why a forecast you adjust towards a target no longer predicts anything. Covers the rolling forecast. 302 pages, for anyone who wants to do it the way a controller would.
View the bookApply it
- 1
1. Build up your revenue
Write down the sum your revenue comes from: capacity times utilisation times rate, or customers times order times frequency. Start from last year's utilisation and rate, and write down why wherever you depart from them.
- 2
2. Adopt the budget
Go through it with your leadership team, line by line and month by month, with working days and seasonality built in. Then adopt it. From that moment on, you don't change it.
- 3
3. Put every change in the forecast
A new client, someone leaving, an investment: they go in the forecast as soon as you know about them. After each closed month you enter the actuals and look twelve months ahead.
- 4
4. Explain the big differences every month
Actuals next to budget, line by line. Agree the amount above which a difference gets an explanation, for example €5,000 or five per cent. Split revenue into volume and rate. For each difference, note whether it's a one-off or belongs in the forecast.
- 5
5. Only revise the budget for a real break
An acquisition, a big client dropping out, a new office. Then you revise the budget, and keep measuring against the first one. A setback is no reason to revise.
Examples
The revenue assumption: a consultancy with fourteen consultants
Capacity: 14 consultants × 1,600 available hours a year (after holidays, bank holidays, sickness and training) = 22,400 hours. Utilisation: 70%, the same as last year. That's 15,680 billable hours. Rate: €110 per hour on average, after discounts. Revenue: 15,680 × €110 = €1,724,800. For the first quarter: 5,600 available hours, 3,920 billable, €431,200 revenue.
The variance analysis for the first quarter
Line: Budget / Actuals / Difference Revenue: €431,200 / €414,000 / €17,200 adverse Staff: €330,000 / €352,000 / €22,000 adverse Premises: €24,000 / €24,000 / €0 Other operating costs: €36,000 / €34,000 / €2,000 favourable Profit (EBITDA): €41,200 / €4,000 / €37,200 adverse Revenue, split: Actual: 3,600 billable hours at €115. Budget: 3,920 hours at €110. Volume: (3,600 minus 3,920) × €110 = €35,200 adverse. Utilisation was 64% instead of 70%. Rate: (€115 minus €110) × 3,600 = €18,000 favourable. The January price rise worked. Together €17,200 adverse. Staff, split: A new consultant started in February instead of April: two months' salary, €12,000. Temporary cover for long-term sickness: €10,000. What it tells you: price isn't the problem. Utilisation has dropped because the new consultant isn't billable yet and someone is off sick. The temporary cover picked up some of the work, but not the billable hours. What goes in the forecast: the new consultant reaches 60% utilisation from May and 70% from September. The temporary cover runs until the end of April. The €115 rate holds. The budget stays as it is.
Do this in your own business
Everything up to here is free. What you fill in for your own business, you keep in Boldcaster.
- Go to Budget & forecast. On Budget & forecast you first fill in your budget and adopt it with Adopt budget. Then the Forecast tab appears, where you update what you expect now. Under Actuals you'll find Budget, Actuals and Difference for each line, plus a chart of Budget, Forecast and Actuals across the year. After Revise budget, Actuals keeps measuring against the first full budget by default.
- You assign the lesson to your team and see who has done it.
- The quiz counts towards your progress, and you see which lesson comes next.
Four weeks free. You'll land straight in this lesson.
Quiz
6 situations. You need 5 of 6 right. You can try again at any time.
1.In April a client worth €80,000 a year gives notice. The budget was adopted in December. What do you do?
2.A business adjusts its budget every month to the latest figures. In December it's spot on. What's the problem?
3.Budget: 2,000 hours at €100. Actual: 1,800 hours at €105. Revenue is €11,000 lower. How do you split that?
4.Your leadership team proposes budgeting revenue at last year plus fifteen per cent. What do you ask first?
5.It's October. Your forecast runs to 31 December. Why is that a problem?
6.In June you acquire a competitor with twenty people. What do you do with the budget?
Nothing is saved here. In the app, the quiz counts towards your progress.
Read next
- The levers · You know the seven levers for profit and cash, you know what 1 per cent or one day is worth in your business, and you pick the lever you'll pull this quarter.
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