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Budget variance analysis involves comparing actual results to budget values for the same time period in order to identify variations. Since the budget serves as a financial blueprint for an organization to follow, it is important for business owners to see how their actual figures compare to their original budget. Not only does a budget variance analysis help finance teams better meet their business objectives, but it also provides them with meaningful insights on a periodic basis. By identifying where a company is overspending, business leaders can then take corrective action to improve their financial planning for the future.
The process of comparing the annual budget to actual performance is really quite simple. However, the actual analysis is what management teams use to gain strategic insight. Organizations can see whether they have a favorable variance or an unfavorable one. If the results are favorable, that means the company’s actuals exceeded expectations.
However, if the outcome was negative, that means that actual spending was higher than expected. With this information, department leaders can then make more informed decisions and have a greater degree of control over their business unit.
Why is budget variance analysis important to a business?
This process helps companies understand what is going right and wrong within their operations. It allows businesses to make adjustments to their financial planning by using flexible budgets so that they can continue to grow and thrive. In addition, budget variance analysis reveals areas where there may be opportunities for improvement. For example, if a company has been consistently underperforming, it might want to consider hiring additional staff members to increase productivity. On the other hand, if a company has had consistent positive variances, it could use this information to determine which projects should receive more funding.
How do I conduct a budget variance analysis?
The best way to conduct a budget variance analysis is to create a budget vs. actuals report for a specific period of time. You’ll need to enter all of your monthly expenses into a spreadsheet program or FP&A software. Once you’ve entered all of your data, you will be able to calculate the difference between your actual costs and your actual budget. This will allow you to see how much money your company spent compared to what it planned to spend in a certain period of time.
Once you have conducted your budget vs. actuals reporting, you’ll want to look at the overall picture. Are you spending too much or not enough? Do you have unfavorable variances that may cause potential issues? These questions will help you decide whether you need to adjust your budget or if you’re doing well for that financial reporting period.
Once you’ve determined how much money your company spends compared to what it plans to spend, you’ll want to analyze the reasons behind these variances. Why did your company spend more or less than expected?
Did your organization experience unexpected costs that were not accounted for during your business planning session? What were some of the factors that contributed to these variances? By taking a more strategic approach to your annual business budget, the more informed you and your Finance team will be when conducting budgetary planning moving forward.