Budgetary variance is a powerful tool that helps businesses stay on track with their financial goals. It allows companies to spot when things are off course quickly and highlights the areas that need attention. In this guide, we’ll dive into budgetary variance, how to calculate it, how to analyse it effectively, and why it’s essential for maintaining control over your finances and ensuring your business is positioned for success.
What is Budgetary Variance?
Budgetary variance is the difference between the budgeted or forecasted financial figures and the actual financial outcomes. This variance is a key indicator for businesses to assess whether their economic performance is aligned with their expectations. By analysing budgetary variance, companies can understand the reasons behind discrepancies, allowing them to take corrective actions and refine future budgets.
Budgetary variance plays a significant role in financial planning because it highlights areas where the business is overspending or underperforming, helping to make more informed decisions in the future.
Types of Budgetary Variance: Favourable vs. Unfavourable
Understanding the nature of budgetary variance is critical for businesses to act appropriately. There are two primary types of variance:
Favourable Variance
A favourable variance occurs when the actual financial performance exceeds the budgeted figures. For example, if a company had budgeted £10,000 in sales but achieved £12,000, the £2,000 excess is a favourable variance. This suggests that the business is performing better than expected and might have higher profitability or revenue than anticipated.
Unfavourable Variance
An unfavourable variance occurs when actual results fall short of the budgeted figures. For example, if a company’s budgeted expenses were £5,000, but the actual costs reached £6,000, the £1,000 difference is an unfavourable variance. This could indicate inefficiency, unexpected costs, or poor financial planning.