How can you conduct a budget variance analysis?

1 Define the scope and period

The first step is to define the scope and period of your budget variance analysis. This means deciding what level of detail and granularity you want to use, such as by department, product, or activity. It also means choosing the time frame for your comparison, such as monthly, quarterly, or annually. The scope and period should be relevant and consistent with your budgeting objectives and reporting requirements.

2 Gather the data

The next step is to gather the data for your budget variance analysis. This includes the actual results and the budgeted figures for the same period and scope. You can use various sources of data, such as accounting records, financial statements, invoices, receipts, or reports. You should ensure that the data is accurate, complete, and reliable, and that you use the same accounting methods and standards for both the actual and the budgeted data.

3 Calculate the variances

The third step is to calculate the variances between the actual and the budgeted data. A variance is the difference between the two figures, expressed as a positive or negative number, or as a percentage. You can calculate variances for different types of data, such as revenue, expenses, profit, cash flow, or key performance indicators. You can also calculate variances for different categories or subcategories within each type of data, such as by product line, customer segment, or region.

4 Analyze the causes

The fourth step is to analyze the causes of the variances. This means identifying and explaining the factors that contributed to the differences between the actual and the budgeted data. Some of the common causes of variances are changes in market conditions, customer demand, prices, costs, efficiency, quality, or external events. You should also distinguish between favorable and unfavorable variances, which indicate whether the actual results were better or worse than the budgeted results.

5 Evaluate the implications

The fifth step is to evaluate the implications of the variances. This means assessing the impact and significance of the differences between the actual and the budgeted data on your business or project performance, goals, and strategy. You should consider how the variances affect your profitability, liquidity, solvency, growth, and competitiveness. You should also evaluate whether the variances are temporary or permanent, and whether they are controllable or uncontrollable.

6 Take action

The final step is to take action based on your budget variance analysis. This means deciding what changes or improvements you need to make to your budgeting process, your operations, your products or services, or your strategy. You may need to revise your budget, adjust your forecasts, implement corrective measures, optimize your resources, or pursue new opportunities. You should also communicate your findings and recommendations to your stakeholders, such as managers, employees, investors, or customers.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?