How to Do a Budget Variance Analysis in 30 Minutes
Budgets can be difficult. While properly analyzing trends and patterns in your financial history and projections is an essential part of budgeting and forecasting, it requires long hours of tedious work if done manually. In fact, many businesses hire FP & A personnel specifically to perform tasks related to variance and analysis.
Whether you’re a small business or an established corporation, you know that few things require more attention and analysis than your budget. So many factors go into creating and adjusting budgets that it’s hard to keep track of every variable and the potential outcome. However, this is where a special process known as budget variance comes into play.
What Is a Budget Variance Analysis?
Budget variance analysis refers to the process of helping a business achieve its goals by analyzing several components:
Actual budget results
Variances within the budget
Disparities between budget projections and results
Performing a standard budget variance analysis requires management to compare their budget projections to the actual results and assess the disparities between the two. Budget variance analysis helps business management track favorable and negative budget variances and determine how to adjust the budget to better serve the business’s goals.
By studying a business’s budget variance, management can spot unexpected changes in performance — for good or bad. This helps business leaders set realistic future expectations and design a path that leads to future success. Getting from where you are now to your eventual goals is hardly a linear path, and understanding budget variance is key to making steady progress while avoiding financial pitfalls.
When performing financial variance analysis, some smaller companies prefer to delegate the task to experts with more extensive experience with budget variance analysis tools and reporting. Within larger companies, budget variance analysis is typically performed by a team built specifically for FP & A variance analysis tasks. Whatever the case may be with your business, it’s important to master budget variance analysis as early as possible.
The Two Types of Budget Variance
In the budget variance analysis process, the results are most often categorized into two types — “favorable” variance and “negative” variance. The main difference between the two is fairly self-explanatory. Whereas favorable budget variance refers to a positive difference between projected and actual budget outcomes, such as higher profits, a negative variance literally indicates a negative outcome, such as net loss.
You can learn more about each type of budget variance below.
Favorable variance is an indicator that a company is doing better than expected in a certain area. Many people think of favorable variance as a “pleasant surprise” — for example, a product sees more sales revenue than expected or the cost of implementing a new product or system is lower than expected. There are many factors that can influence favorable variance in budget analysis.
Like favorable variance, negative variance is what it sounds like. Negative variances typically signal a loss in revenue. Perhaps a certain product didn’t sell as well as projected, or maybe one of the business’s suppliers hiked the price of certain goods or materials. Whatever the case may be, negative variance needs to be taken very seriously.
Luckily for businesses with good budget variance analysis practices, negative variances will spur a positive adjustment in business strategy to adapt to future challenges.
Best Practices for Budget Variance Analysis
Budget variance analysis is an essential part of every business’s financial management process. However, you can only benefit from budget variance analysis if you’re doing it correctly.
Many business management professionals who are unfamiliar with how to do a budget variance analysis tend to overlook important budget factors or even put off the variance reporting and analysis. This can lead to missed opportunities to improve company performance. Thankfully, with the right tools and strategies, budget variance analysis doesn’t need to be a dreaded task.
Here are a few best practices to implement in your budget variance analysis process:
Schedule specific times to perform budget variance analysis tasks throughout the year. Regular variance analysis is key in improving a business’s performance.
Take corrective action as soon as you discover negative — or positive — variance to prevent an existing problem from getting worse or to capitalize on a golden opportunity in the market. Keep a close eye on the economic conditions surrounding your business.
Automate wherever you can. Have budget variance analysis software take a chunk of the leg work out for you!
Steps to Complete a Budget Variance Analysis
The steps to completing a budget variance analysis are simple, but they’re made even simpler by implementing software automation. Your FP & A personnel or management will:
1. Analyze differences in actual results versus budget: If significant disparities are discovered, typically 10% or more, then these variances must be analyzed to find out why they occurred in the first place. While manual budget variance analysis can take hours of spreadsheet hopping, an automated solution will take only minutes to do the same task.
2. Figure out why the difference occurred: Whether the difference is positive or negative, you always need to pinpoint its underlying cause so you can learn from the occurrence. The time this takes will vary depending on the variances in question.
3. Put together a report: This report should document the budget and variance analysis and the reasons for any variance. Automated software can do this for you.
4. Brainstorming with management and financial analysts: After completing the analysis, you’ll want to consider how to move forward based on the results.
The basic steps of performing a budget variance analysis may seem simple, but they can happen much faster and with more accuracy when using software than when doing the entire process manually.