Creating a budget is a crucial task for any business. It helps owners, executives, and managers estimate revenues and expenses, set goals, and closely monitor costs throughout the year.
Of course, budgets are just that — estimates. The final amounts for revenues and expenses at the end of the month, quarter, or year will almost certainly differ from budget projections. Those differences are called variances and analyzing those variances can give leaders a deeper understanding of a company’s financial well-being.
What is variance analysis?
Variance analysis investigates the differences between budgeted and actual results.
For example, if you budget for $1 million in sales and actual sales are $800,000, your variance is $200,000. Comparing your budget to actual results is a helpful first step but investigating the reason for the difference is essential.
These factors and others can contribute to variances, so taking the time to understand why fluctuations occur can help management know what they need to do to change the situation.
What causes budget variances?
Variances can occur for various reasons. Some of the most common include:
How is a variance analysis created?
Modern accounting software makes creating a variance analysis relatively straightforward. Most solutions include a budget-to-actual report that compares actual results to the budget and finds the difference between the two values as a number and a percentage.
You can then export this report to an Excel or Google spreadsheet, adding a column for explanations for any budget deviations.
The following best practices can make this process more manageable.
How often should you prepare variance reports?
The cadence with which you prepare variance reports will depend on the size of your company and management needs. A small business might only go through the process quarterly or annually.
On the other hand, a larger company or one that is experiencing rapid growth might perform the analysis every month.
At a minimum, you should review your budget to actual numbers every month, looking for unexpected discrepancies. This high-level review can help you quickly spot errors or identify trends so you can take action to keep the business on track.
Do you need help analyzing or setting up your variance reports? Give our team a call today to set up a strategy!
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