How can you reduce variance between actual and budgeted performance?

1 What is variance analysis?

Variance analysis is the process of comparing your actual performance with your budgeted or forecasted performance, and identifying the reasons for the differences. It helps you to evaluate your performance, identify problems and opportunities, and adjust your plans accordingly. Variance analysis can be done at different levels, such as by product, department, project, or company. It can also be done for different aspects of your performance, such as sales, costs, revenue, profit, or cash flow.

2 How to calculate variances?

To calculate variances, you need to have both your actual and budgeted or forecasted data for the same period. Then, you can subtract the actual data from the budgeted or forecasted data to get the variance. For example, if your budgeted sales for the month were $100,000 and your actual sales were $90,000, your sales variance would be -$10,000. This means that you sold $10,000 less than expected. You can also express the variance as a percentage of the budgeted or forecasted data, by dividing the variance by the budgeted or forecasted data and multiplying by 100. For example, the sales variance of -$10,000 would be -10% of the budgeted sales.

3 How to analyze variances?

Once you have calculated the variances, you need to analyze them to understand what caused them and what actions you need to take. There are two types of variances: favorable and unfavorable. A favorable variance means that your actual performance was better than your budgeted or forecasted performance, while an unfavorable variance means that your actual performance was worse than your budgeted or forecasted performance. For example, a positive sales variance is favorable, while a negative cost variance is unfavorable. However, not all variances are equally important or significant. You need to consider the magnitude, frequency, and direction of the variances, and prioritize the ones that have the most impact on your goals and objectives.

4 How to reduce variances?

To reduce variances, you need to take corrective actions based on your variance analysis. These actions can include revising your budget or forecast, improving your processes or systems, changing your strategies or tactics, or communicating with your stakeholders. For example, if you have a negative sales variance, you may need to increase your marketing efforts, adjust your pricing, or offer incentives to your customers. If you have a positive cost variance, you may need to reduce your expenses, negotiate with your suppliers, or implement cost-saving measures. The key is to align your actions with your desired outcomes and monitor the results.

5 How to improve your budgeting and forecasting?

Reducing variances is not only about fixing problems, but also about preventing them from happening in the first place. To improve your budgeting and forecasting, you need to involve your team and stakeholders in the process, use reliable and relevant data and assumptions, set realistic and achievable goals and targets, use flexible and dynamic models and tools, and review and compare your budget and forecast with your actual performance. Doing so can help you to increase accuracy, efficiency, and profitability, as well as achieve your goals and objectives. Although budgeting and forecasting are not perfect sciences, they can still be beneficial in planning, managing, and improving business performance.

6 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?