Business owners should review both their monthly actual performance against budget and a forward-looking report combining actual results with the remaining budget.

Together, these reports help you understand not only what has happened, but whether your business is still heading towards the financial position you expected.

In the video above, Paul explains the two reports he reviews every month in Xero. The first focuses on the individual month, comparing actual income, direct costs and overheads with budget. The second provides a wider view of the year, combining actual figures for completed months with budgeted figures for the months still to come.

The important part is understanding why there are differences. A variance might be caused by a one-off bill or something being posted incorrectly, but it could also reflect a fundamental change in the business. For example, hiring a new team member creates an ongoing cost that should be reflected in the forecast for the rest of the year.

By reviewing these differences and regularly updating the forecast, you get a much clearer picture of where the business is heading rather than relying solely on historic financial information.

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