Budget variance is the practice of creating a periodical variance report – monthly, bi-monthly, and quarterly through employing the use of a tool to assess financial and operational data. The larger aim of budget variance is for companies to spot points of variance in the actual versus budgeted figures, and also determine the factors that cause it.
As your local accountant in Brookvale and greater Sydney, we can help businesses formulate their budgets and create variance reports and variance analysis to track, monitors, and also compare the change in financial performances from one month to the next.
The budget is created against a forecast and variance is accounted for the actual expenditure to compare against the budget. This practice of comparison makes sense of financial data and processing results to help companies plan better.
Before we go into the importance of budget variance, it is imperative to understand favorable and unfavorable variance:
Understanding Favorable & Unfavorable Variance:
Favorable and unfavorable budget variance are accounting terms used to describe positive and negative variance causing gains or losses in the budget variance compared to the actual budget. A favorable and unfavorable variance is a potential occurrence as forecasting cannot be 100% accurate and external factors also have a stake in actual expenditures.
A favorable variance will show what’s working well for the business, which segment of operations is doing better than the other, and which functions are more profitable. Hence, companies can enhance the driving force for more profits.
At the same time, an unfavorable variance will show trends that are not working in favor of the business. This can include inaccurate forecasting, poor planning, change in market circumstances, and the occurrence of natural disasters, customer acquisition, and changes in costs.
As your local accountant in Brookvale and greater Sydney, we have put together the following list to help your business not only stay afloat but also to financially thrive.
- Identify Trends and Patterns:
Regular variance analysis can show trends, patterns, and identify strong and weak points for the business. This will help the company analyze issues, opportunities, short and long-term trends, and the road to financial success. Variance analyses show insights that may get missed in annual financial reporting.
- Financial Forecasting:
Analysing budget variance can help in financial forecasting. By nature, variance takes into account existing and past data and shows budgetary patterns and trends concerning different variables that might account for seasons, holidays, sales/discounts, special occasions and others, which maybe impacting the budget directly or indirectly. Variance data allows the identification of context and helps to construct a theory to place more predictable financial forecasting. At a minimum, business should consider doing quarterly variance analysis that can help construct more realistic and achievable financial predictions.
- Responding to External Variables:
Fluctuations in the market, environmental changes, change of external vendors, etc. all form part of external variables which impact the environment for the business but are out of control for the business owner. Pairs and groups of related and unrelated variables may also come forward as part of variance analysis. Favorable correlations will have a positive impact on the budget and unfavorable ones will respond negatively. Hence, adopting a routine practice of creating budget variance can not only help identify external factors but also enable you to be prepared for any eventualities so that you can be proactive in your financial planning.
- Enables Flexibility:
As your local accountant in Brookvale and greater Sydney, we recommend having flexibility in the budget, as compared to keeping the budget static. A flexible budget, with periodic variance, allows for adaptability and also lowers the chances for unfavorable variance. It also gives financial room to adjust favorable and unfavorable variances in the next months of planning.
- Shows Where the Business Stands:
Budget variance can help improve business operations. It allows businessowners/managers to dig deeper into revenue, profit, and loss charts and locate exactly where what has worked in favor of the business and what has not. Hence, it can give a clearer financial picture and help plan a forecast for the upcoming year. Overall, variance is a great way to assess the company’s performance in the past year, past month, and how it can improve further.
In Summary:
- Budget variance is an accounting term that considers the period financial data and shows periods where the company has spent more or less than the actual/projected cost.
- If described simply, budget variance shows the actual expenditure in comparison to the budgeted figures.
- Favorable variance is again and unfavorable variance describes a loss when actual cost/expenditure is compared to the budgeted cost/expenditure.
- Variance can occur in the budget due to external and internal factors. However, maintaining a period budget variance helps companies project more accurate forecasts and plan effectively.
- There are several advantages of making period budget variance that include trend identification and understanding the low and high performing activitiesfor business operations.
- Having period variance allows companies to forecast more accurately and proactively plan for changing external and internal factors.
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