How to Conduct Budget Variance Analysis in 30 Minutes

Budgets can be challenging. 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 companies hire FP&A (Financial Planning and Analysis) staff specifically to perform tasks related to variance and analysis.

Whether you are a small business or an established corporation, you know that few things require more attention and analysis than your budget. So many factors come into play in budget creation and adjustment that it's difficult to track every variable and 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 company achieve its goals by analyzing various components:

1. Budget projections
2. Actual budget results
3. Variances within the budget
4. Disparities between budget projections and results

Conducting a standard budget variance analysis requires management to compare budget projections with actual results and assess the disparities between the two. Budget variance analysis helps business management track both favorable and unfavorable budget variances and determine how to adjust the budget to better meet the company's objectives.

By studying a company's budget variance, management can detect unexpected changes in performance, for better or worse. This helps business leaders set realistic future expectations and design a path leading to future success. Moving from where you are now to your ultimate goals is not a linear path, and understanding budget variance is key to making consistent progress while avoiding financial pitfalls.

When generating financial variance analysis reports, some smaller companies prefer to delegate the task to experts with broader experience in budget variance analysis tools and reporting. In larger companies, budget variance analysis is often performed by a team specifically created for FP&A analysis tasks. Whatever the case with your business, it's important to master budget variance analysis as soon as possible.

The two types of budget deviation: In the budget variance analysis process, results are most often classified into two types: "favorable" variance and "negative" variance. The main difference between the two is quite self-explanatory. While favorable budget variance refers to a positive difference between projected and actual budget results, such as higher profits, negative variance literally indicates a negative outcome, such as a net loss.

You can learn more about each type of budget variance below.

Favorable: Favorable variance is an indicator that a company is performing better than expected in a specific area. Many people think of favorable variance as a "pleasant surprise," for example, a product generates 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.

Negative: Just like favorable variance, negative variance is what it sounds like. Negative variances usually indicate a loss of revenue. Perhaps a certain product did not sell as well as projected, or maybe one of the business's suppliers increased the price of certain goods or materials. Whatever the case, negative variance should be taken very seriously.

Fortunately for companies with good budget variance analysis practices, negative variations will drive a positive adjustment in the business strategy to adapt to future challenges.

Best practices for reporting and analyzing budget variances: Budget variance analysis is an essential part of every company's financial management process. However, you can only benefit from budget variance analysis if you are doing it correctly.

Many business management professionals who are not familiar with how to conduct budget variance analysis tend to overlook important budgetary factors or even postpone deviation reports and analysis. This can lead to missed opportunities to improve company performance. Fortunately, with the right tools and strategies, budget variance analysis doesn't have to be a dreaded task.

Here are some recommended practices to implement in the budget variance analysis process:

1. Schedule specific times to perform budget variance analysis tasks throughout the year. Regular variance analysis is key to improving a company's performance.

2. Take corrective action as soon as you discover a negative or positive variance to prevent an existing problem from worsening or to capitalize on a golden opportunity in the market.

3. Monitor closely the economic conditions surrounding your business.

4. Automate where you can. Let budget variance analysis software do some of the heavy lifting for you!

Steps to complete a budget variance analysis: The steps to complete a budget variance analysis are simple but are further simplified by implementing software automation. Your FP&A staff or management will complete these steps in the budget variance analysis:

1. Analyze differences in actual results versus budget.

   • If significant disparities, usually 10% or more, are discovered, these variances should 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 a few minutes to perform the same task.

2. Find out why the difference occurred.

   • Whether the difference is positive or negative, you should always identify its underlying cause so that you can learn from the occurrence. The time this takes will vary depending on the deviations in question.

3. Create a report.

   • This report should document the budget and variance analysis and the reasons for any deviations. Automated software can do this for you.

4. Brainstorm 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 for conducting budget variance analysis may seem simple, but they can happen much faster and more accurately when using software than when doing the entire process manually.

Choose Solver's cloud-based CPM solution for your software needs: To complete your business's budget variance analysis in less than 30 minutes, contact Solver Global today for information on how you can take your company to the next level with budget variance analysis software. We offer comprehensive corporate performance management solutions for businesses in virtually every industry. Let us help you automate your business processes and save you time, money, and energy!