Reconcile your budget vs actual to the cash that left your account

A budget vs actual report compares the income and expenses you planned with the ones you recorded, so it can show a month on budget while your bank balance fell. Four outflows never reach it: loan principal, owner draws, equipment you capitalized and sales tax you remitted. Reconcile the report to the bank with one short bridge and the gap gets a name.

The worked month below belongs to a three-van commercial refrigeration and HVAC company whose customers are restaurants, the kind of service business that buys parts and bills for jobs. Every dollar figure is illustrative.

What does a budget vs actual report compare?

A budget vs actual report lines up each income and expense account against the amount you budgeted for it and shows the difference, called the variance. Revenue above budget or costs below it is a favorable variance. The reverse is unfavorable.

Both of the ledgers this reader uses describe it in those terms. Intuit's help article Create budgets in QuickBooks Online, read in October 2026, describes the point of a budget as comparing your actual income and expenses against it. Xero's help page for its Budget Variance report, read the same month, says the report compares your actual revenue and expenses with budgeted amounts.

Here is October for the refrigeration company, as its profit and loss budget vs actual prints it.

Every line is within about 2% of plan. By the report, October was a good month. The business checking account finished it $11,100 lower than it started.

Why can a month come in on budget and leave less cash?

A month comes in on budget and leaves less cash when money leaves the business through transactions that are not income or expense. A profit and loss budget only has lines for income and expense, so those payments have nowhere to appear. Four of them have an account you can read the month's figure from.

Each row rests on a definition rather than a convention. FASB's Concepts Statement No. 8, Chapter 4 (December 2021) defines a liability as a present obligation to transfer an economic benefit, and says that borrowing cash obligates an entity to repay the amount borrowed, so a principal payment settles an obligation rather than using anything up. The same chapter defines distributions to owners as decreases in equity, and excludes them from comprehensive income altogether. That is why only one part of a loan payment lands on the profit and loss, and why a draw never does.

Equipment works on a delay. IRS Publication 946 (2025) describes depreciation as recovering the cost of property over the time you use it, for property whose useful life extends substantially beyond the year you put it in service. The cash leaves the day you pay the invoice. The expense arrives in slices. Which purchases your books expense at once and which they capitalize is set by your own policy, and the de minimis safe harbor and the capitalization policy behind it decide most of the small ones.

Sales tax is the one that sits in your account longest before it leaves. Colorado's Department of Revenue states the position plainly in its Sales Tax Guide: sales tax a customer pays to a retailer is public money and the property of the state, held in trust until it is remitted. Other states word it differently, so check your own state's department of revenue, but recorded correctly the tax goes to a liability when you collect it and comes out of the liability when you pay it. Neither event touches income or expense.

How do you reconcile budget vs actual to the bank balance?

You reconcile budget vs actual to the bank by starting from actual net income, adding back what was expensed without cash leaving, and then adding or subtracting the movement in each balance sheet account the budget does not cover. The result should equal the change in your reconciled bank balance. Here is the refrigeration company's October.

The month beat its budget by $400 and the bank fell by $11,100. Nothing went wrong. The owner bought equipment, paid the quarter's sales tax and took a normal draw in the same four weeks, and none of the three is a line on the budget.

Run it on your own books in this order:

1. Run budget vs actual for the month and write down actual net income.

2. Run two balance sheets, dated the last day of this month and the last day of last month, and put them side by side.

3. For each loan, subtract this month's balance from last month's. A fall is principal repaid. A rise means new borrowing came in, and it goes in as an addition.

4. Take this month's movement in the owner's draw or distributions account. An owner contribution goes in as an addition.

5. Take the increase in fixed assets at cost, then add back the month's depreciation from the profit and loss.

6. Take the change in sales tax payable. It already nets what you collected against what you remitted.

7. On accrual books, take the change in accounts receivable and accounts payable. Receivables going up is cash you have not collected yet; payables going up is cash you have not paid yet. On cash books, skip this step.

8. Add it up and compare it with the change in your reconciled bank balance.

If the bridge does not land on the bank figure, the remainder is a balance sheet account this list does not name, such as a credit card balance or a prepaid insurance policy, or a bank account that has not been reconciled. The bridge only works on a balance sheet reconciled every month, because every row after the first is read off it.

How do you put the four outflows into next year's budget?

You put the four outflows into a budget by adding rows for them beneath the profit and loss, so the plan ends at a cash figure instead of at net income. Each of them can be scheduled before the month starts, which revenue cannot.

QuickBooks Online also lets you build a balance sheet budget alongside a profit and loss one, according to the same Intuit help article. That is the native place to plan loan balances and equity. The rows above do the same job in whatever spreadsheet you already keep, and they do it in the order you will feel them.

The useful thing this changes is the timing of the controllable rows. Draws and equipment are the two you decide. If the plan shows a quarter-end sales tax payment, a loan payment and a planned equipment purchase landing in the same month, moving the purchase or the draw by four weeks is a decision you can make in January rather than discover in April. Whether to finance a purchase or pay cash for it is a question for you and whoever advises you on borrowing. What the budget can do is show you the month it lands.

What is the difference between a budget, a forecast and actuals?

A budget is the plan you set before the period starts, a forecast is your current estimate of how the period will end, and actuals are what your books recorded. The budget stays fixed so the variance means something. The forecast moves as the year does. A budget vs actual report compares the first with the third, and a forecast vs actual report compares the second with the third. When all three are built on the profit and loss, all three miss the cash that left through loan principal, owner draws, capitalized equipment and sales tax.

How do I create a budget for a small business?

A small business budget is most reliable when it starts from your own last 12 months of actuals, month by month, rather than from a percentage someone else published. Export a monthly profit and loss for the past year, adjust each line for what you already know will change, such as a new hire, a rent increase or a contract that ended, and keep the seasonal shape your own history shows. Then add the four cash rows beneath it: loan principal, owner draws, planned equipment purchases and sales tax. A budget that stops at net income tells you whether the year should be profitable. One that ends at cash tells you whether you can afford it month by month.