How to conduct budget variance analysis in 30 minutes-2

Budgets can be challenging. While analyzing trends and patterns in your financial history and projections is an essential part of budgeting and forecasting, it demands long hours of tedious work if done manually. In fact, many companies hire FP & A 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. There are so many factors that go into creating and adjusting budgets that it's hard to track each variable and its potential outcome. However, that's where a special process known as budget variance comes in.

What is Budget Variance Analysis?

Budget variance analysis is a process that helps a business achieve its goals by analyzing several elements:

• Budget projections
• Actual budget results
• Variations within the budget
• Disparities between budget projections and results

To perform a standard budget variance analysis, management must compare budget projections to actual results and assess the disparities between the two. Budget variance analysis helps the company's management track favorable and unfavorable budget variances and determine how to adjust the budget to better serve the company's goals.

By studying a company's budget variance, management can spot unexpected changes in performance, whether positive or negative. This helps business leaders set realistic expectations for the future and chart a path to future success. Understanding budget variances is crucial for progressing steadily while avoiding financial pitfalls.

When preparing financial variance analysis reports, some small businesses prefer to delegate the task to experts with greater experience in budget variance analysis tools and reporting. In large enterprises, budget variance analysis is typically conducted by a team specially assembled for FP & A analysis tasks. Whatever the case for your business, it is important to master budget variance analysis as early as possible.

The Two Types of Budget Variances

In the budget variance analysis process, results are most often classified into two categories: "favorable" variances and "unfavorable" variances. The main difference between the two is quite explicit. While a favorable budget variance refers to a positive difference between budgeted and actual results, such as higher profits, a negative variance literally indicates a negative outcome, such as a net loss.

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

Favorable

A favorable variance is an indicator that shows a company is performing better than expected in a certain area. Many consider a favorable variance as a "pleasant surprise" – for example, a product's revenue is higher than forecasted, or the cost of implementing a new product or system is lower than projected. Many factors can influence a favorable variance in budget analysis.

Unfavorable

Just as the name suggests, an unfavorable variance is what it seems. Unfavorable variances typically signal a loss of revenue. Perhaps a certain product didn't sell as well as expected, or maybe one of the company's suppliers increased the price of certain goods or materials. Whatever the case, unfavorable variances must be taken very seriously.

Fortunately, for businesses with good budget variance analysis practices, unfavorable variances will result in a positive adjustment to the business strategy to adapt to future challenges.

Best Practices for Budget Variance Reporting and Analysis

Budget variance analysis is an essential element of any business's financial management process. However, you can only benefit from budget variance analysis if done correctly.

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

Here are some 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 crucial to improving a company's performance.
• 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.
• Keep an eye on economic conditions surrounding your business.
• Automate wherever you can. Have budget variance analysis software take much of this work off your plate!

Steps to Perform Budget Variance Analysis

The steps of budget variance analysis are simple, but they are made even simpler through software automation. Your FP & A staff or management will perform these budget variance analysis steps:

1. Analyze variances between actual results and the budget: If significant disparities are discovered, typically 10% or more, then these variances need to be analyzed to find out the reason. While manual budget variance analysis can take hours sifting through spreadsheets, an automated solution will only take a few minutes to perform the same task.
2. Determine why the difference occurred: Whether the variance is positive or negative, you always need to determine the underlying cause to learn from it. The time required for this task varies based on the variances in question.
3. Write a report: This report should document the budget and variance analysis, along with the reasons for any variances. Automated software can do this for you.
4. Brainstorming with management and financial analysts: Once the analysis is complete, you'll need to brainstorm how to move forward based on the results.

The basic steps of budget variance analysis may seem simple, but they can be done much faster and more accurately if you use software than if you go through the entire process manually.

Choose the Cloud-Based CPM Solution from Solver for Your Software Needs.

In order to perform your company's budget variance analysis in less than 30 minutes, contact Solver Global today to find out how to take your business to the next level with budget variance analysis software. We offer comprehensive solutions for enterprise performance management for businesses in virtually every industry. Let us help you automate your business processes and save your time, money, and energy!