Budget Variance: What is it and How to Calculate Variances

Don’t make the mistake with financial projections of picking some arbitrary percentage to grow your revenue by. Instead, consider how you acquire a customer, the conversion percentage and the length of your sales cycle. If you have recurring revenue you might consider your CAC into your projections and budget. First, determine what program or method you will use to track your budget variances. Our favorite approach for calculating accurate variance calculations is to use either dashboards or dynamic spreadsheets customized for your company.

Presentation of Budget Variances

You can’t control the price of gas, but you can control the miles you drive. In this case, if the variance is too costly, you will need to address it by somehow driving fewer miles. To clarify, actuals present concrete results—the ‘as-is’ scenario, whereas the revenue forecast offers a financial roadmap—the ‘to-be’ projection. A thorough examination of the differences between these actual amounts and projected figures enables companies to fine-tune strategies, pinpoint emerging trends, and make well-informed financial decisions.

Favorable Budget Variance

Collect both your budgeted figures and the actual results for the period in question. Regular monitoring of budget variances acts as a financial health check, providing early signals to adjust business strategies. Say you’ve repeatedly seen variances in shipping costs due to fluctuating fuel prices. You might then integrate a flexible shipping costs model into your future budgets.

• It can be positive or negative, indicating that the budget was overestimated or underestimated, respectively.
• Many entrepreneurs will be familiar with your classic budget to actual in monthly reporting.
• Market factors play a pivotal role in budget variance, often acting as an accelerator or a brake on your financial plans.
• Budget variance analysis is a process of comparing the actual performance with the budgeted performance and identifying the causes and impacts of the variance.

What’s more important, expense or revenue variances?

Variances are also measures of the accuracy of your projections; what you learn from them can improve your estimates and your budgeting ability. The unexpected can always occur, but the better you can anticipate what to expect, the more accurate—and useful—your budget process can be. On the other end, fixed variances come into play within the more rigid realms of your budget, budget variance definition where certain costs were expected to stand firm regardless of operational scales.

External factors affecting budget variance

For example, in the wake of COVID-19 restrictions in Q2 of 2020, we increased our forecasting and analysis to a weekly basis. So, you have to find the right cadence for your company’s needs in response to the industry and market environment. Next, perform a detailed analysis of variance data, focusing on both the absolute and relative size of discrepancies. Calculating the percentage variance helps assess its proportional impact on overall financial performance. For example, a $10,000 variance may be less concerning if it represents just 1% of a $1 million budget.

Related Read: Follow along these budget process steps for small businesses. (With free budget template)

Budget variance is the difference between planned and actual financial results, and it happens often in business. Remember, these tools and techniques provide a framework for using budget variance effectively. Each organization may have unique requirements and may need to tailor their approach accordingly. Sometimes a variance cannot be “corrected” or is due to a micro- or macroeconomic factor beyond your control. Some improvements are attributable to Mark’s efforts (cutting back on entertainment expenses, giving up his vacation, cultivating new tutoring clients). But Mark has also benefited from macroeconomic factors that have changed to his advantage (rising interest rates, rising memorabilia prices), and those factors could change again to his disadvantage.

How Should Organizations React to Significant Budget Variances?

Truly controllable expenses are discretionary expenses, which can be eliminated without an immediate adverse impact on profits. Examples of controllable expenses are training and maintenance expenses. Alternatively, if a business experiences favorable cost or revenue variance, it will have extra cash left over. This should be reinvested or allocated for future growth and is also a signal that the company’s budgeting processes need to be revisited for accuracy. Budget variances occur due to changes in costs, marketing conditions, internal operational decisions, and fluctuating sales volume.

Budget variance analysis

• Monitoring these variances can also enhance future budgeting processes.
• Budget variance is the difference between planned and actual financial results, and it happens often in business.
• For example, a business may not be able to fill a position for an extended period of time, resulting in a lower compensation expense than expected.
• Implementing corrective measures and learning from these variances will arm them better for future financial planning, avoiding a repeat of the same budgetary missteps.
• A budget variance report should not only present the numbers, but also interpret and analyze them in a way that adds value and insight to the decision-making process.
• Staying informed about regulatory developments is critical for maintaining financial stability.

If the expense totals say, $11,200 however, then you have a budget variance that needs attention. If you identify that, in fact, you’re only spending $500 a month on office expenses, then you have an extra $6,000 for the year to play with. You can then choose to redirect this budget into other areas that drive revenue like ads or content marketing. You put together a budget allocation based on your financial projections, and you’ve built department-specific cost analyses to build budgets for marketing, sales, operations, and so forth. For example, in the sample YTD budget vs. actual below, you can see that sales were overpredicted by 16%, and ultimately net income by 48%. That is a drastic difference and highlights exactly why it helps to monitor budget variance throughout the year to tighten up both the budget for next year and issues with sales.

Budget variance is an important tool for planning, controlling, and evaluating the performance of any organization, project, or individual. By understanding the reasons and implications of budget variance, one can take appropriate actions to improve the budgeting process and achieve the desired results. In this section, we will explore how budget variance can vary in different industries and scenarios, and what insights can be derived from it. We will look at some case studies of budget variance analysis in various sectors, such as manufacturing, retail, healthcare, education, and non-profit. We will also discuss how different factors, such as seasonality, market conditions, external events, and internal changes, can affect the budget variance.

A good rule of thumb is to consider anything over 10% as unusually volatile for expenses. To calculate the percentage budget variance, divide by the budgeted amount and multiply by 100. These variances often point to issues in demand forecasting, production planning, or capacity utilization. Addressing them may involve revising sales forecasts, optimizing production schedules, or investing in additional capacity.

Recognizing these differences allows you to hone your financial strategies. Suppose a company projected sales revenue of $100,000 for a quarter but achieved $120,000; this results in a $20,000 or 20% favorable variance. Conversely, if the budgeted expenditure was $80,000 and the actual expenditure touched $85,000, this would reflect a $5,000 or 6.25% unfavorable variance. When faced with significant budget variances, organizations should spring into action by analyzing the root causes. Adaptation is key; they might need to revise forecasts, tweak strategies, or renegotiate contracts.