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What are the most common budget variances for small businesses?

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Budget variances are the differences between the actual and planned amounts of income and expenses for a given period. Small businesses can use budget variance analysis to monitor their performance, identify problems, and adjust their strategies. However, not all variances are equally important or indicative of the business's health. In this article, we will discuss some of the most common budget variances for small businesses and how to interpret them.

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Muddasir Farooq, FCCA, BFP ACA

CFO | Driving Financial Growth and Stability
Ali Shariq ACA,ACCA

Chartered Accountant | Finance Professional | IFRS | FP&A | Internal Controls | Compliance | Financial Analyst |…
Siavash Eftekhari

Financial & Economic advisor to Board of Directors at CinnaGen Co.

1 Sales volume variance

This is the difference between the actual and budgeted number of units sold or services provided. It can be positive or negative, depending on whether the business sold more or less than expected. Sales volume variance can affect both revenue and cost of goods sold (COGS), and it can be influenced by various factors, such as market demand, competition, pricing, marketing, and customer satisfaction. To calculate sales volume variance, multiply the budgeted unit price by the difference between the actual and budgeted units sold.

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Muddasir Farooq, FCCA, BFP ACA

CFO | Driving Financial Growth and Stability
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Sales variance is a normal occurrence in any business, but in small business the impact is more as most of the fixed expenses (costs) are based on the sales volume. In order to counter this small business should look into step by step scaling by having flexible budgets which are monitored regularly and changed as the requirement of the business. Although the budgeting for the sales seems to be straightforward but the complexity arises when scaling up the business comes into the equation as most of the scaling up would require additional resources and this will eat into the current margin till the business become stable in the new scale.

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Ali Shariq ACA,ACCA

Chartered Accountant | Finance Professional | IFRS | FP&A | Internal Controls | Compliance | Financial Analyst | Forecasting | Budgeting & Planning | Tax | Finance Business Partnering | Financial Reporting |
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Small businesses often encounter budget discrepancies, which can include differences between budgeted and realized sales, known as revenue variances. Expense variances can also occur due to variations in labor, material, and operating expenses, while fixed vs. variable costs can be affected by changes in fixed and variable expenses. Overhead variances can also arise from fluctuations in overhead costs. Other variances to consider include price and sales volume shifts, manufacturing efficiency variances, timing and cash flow variances, tax variances, capital expenditures, and debt and inventory variances.

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Asha Kanta Sharma

Manager - Finance & Accounts @ Opendoors Fintech | Financial Accounting
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Small businesses face budget variances due to various factors, including revenue, expense, personnel, operational, marketing, capital, interest, financing, inventory, tax, utility, foreign exchange, debt service, insurance premiums, technology, and training costs. These variances can result from changes in market conditions, customer demand, competition, sales strategy effectiveness, and operational issues. Regular monitoring and analysis of these variances can help businesses make informed decisions, identify areas for improvement, and make timely adjustments to strategies, ultimately contributing to their financial health and sustainability.

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2 Sales price variance

This is the difference between the actual and budgeted selling price per unit or service. It can also be positive or negative, depending on whether the business charged more or less than expected. Sales price variance can affect only revenue, and it can be influenced by factors such as market conditions, customer preferences, product quality, and pricing strategy. To calculate sales price variance, multiply the actual units sold by the difference between the actual and budgeted unit price.

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3 Variable cost variance

This is the difference between the actual and budgeted variable costs per unit or service. Variable costs are those that change in proportion to the level of output, such as materials, labor, and utilities. Variable cost variance can be positive or negative, depending on whether the business incurred more or less variable costs than expected. Variable cost variance can affect only COGS, and it can be influenced by factors such as efficiency, productivity, quality, and supplier prices. To calculate variable cost variance, multiply the actual units sold by the difference between the actual and budgeted variable cost per unit.

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4 Fixed cost variance

This is the difference between the actual and budgeted fixed costs for a given period. Fixed costs are those that do not change with the level of output, such as rent, insurance, and salaries. Fixed cost variance can be positive or negative, depending on whether the business spent more or less on fixed costs than expected. Fixed cost variance can affect both COGS and operating expenses, and it can be influenced by factors such as contracts, inflation, and depreciation. To calculate fixed cost variance, subtract the budgeted fixed cost from the actual fixed cost.

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5 Revenue variance

This is the difference between the actual and budgeted total revenue for a given period. It is the sum of sales volume variance and sales price variance. Revenue variance can be positive or negative, depending on whether the business generated more or less revenue than expected. Revenue variance can affect both gross profit and net income, and it can be influenced by all the factors that affect sales volume and sales price. To calculate revenue variance, subtract the budgeted revenue from the actual revenue.

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6 Cost variance

This is the difference between the actual and budgeted total cost for a given period. It is the sum of variable cost variance and fixed cost variance. Cost variance can be positive or negative, depending on whether the business incurred more or less cost than expected. Cost variance can affect both gross profit and net income, and it can be influenced by all the factors that affect variable and fixed costs. To calculate cost variance, subtract the budgeted cost from the actual cost.

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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?

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Siavash Eftekhari

Financial & Economic advisor to Board of Directors at CinnaGen Co.
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budget variances are not necessarily a bad thing. In fact, they can be a sign that the business is growing and changing. However, it is important to understand the causes of budget variances and to make adjustments to the budget as needed. Common favorable budget variances for small businesses include: Higher sales than expected Lower costs than expected Unexpected revenue streams Common unfavorable budget variances for small businesses include: Lower sales than expected Higher costs than expected Unexpected expenses Small businesses should carefully monitor their budget variances and investigate the causes of any significant deviations from the budget. This will help them to identify and address any potential problems early on.

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What are the most common budget variances for small businesses?

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1 Sales volume variance

2 Sales price variance

3 Variable cost variance

4 Fixed cost variance

5 Revenue variance

6 Cost variance

7 Here’s what else to consider

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