What Is a Budget Variance?

Save

A budget variance indicates your company's actual results are different from projected revenue or expenses. Small businesses often project budgets for no more than one year out, but it is typical to have some variance given the difficulty in precisely forecasting demand and costs.

Favorable vs. Unfavorable Variance

Budget variance can be either favorable or unfavorable. When evaluating revenue, favorable variance is when you generate more sales in a given period than you projected. Unfavorable variance means you had a revenue shortfall. On expenses, favorable variance means your costs in a given period were below what you expected. When costs run higher than budgeted, you have unfavorable variance.

Variance Examples

Small businesses often have budgets for the entire company, as well as for each division, department or business unit. Therefore, you can calculate variance at each level.

Assume a company projected revenue of $100,000 and expenses of $50,000 for a particular quarter. During the quarter, management recognized opportunities for growth and invested $10,000 more than projected in marketing-related expenses. The investments paid off and produced $20,000 more in revenue than projected. Thus, the business had a positive revenue variance of $20,000 and a negative expense variance of $10,000. The net difference was a $10,000 positive variance when compared to the overall budget projections.

On a more micro-level, if the business generated $5,000 more revenue than expected at one store but $7,000 less than expected at another, it has a net negative revenue budget variance of $2,000.

Budget Variance Implications

Though some budget variance is common, significant variance may result from poor planning or significant strategic changes after budgets were established. New customer-based or product-based revenue streams that emerge unexpectedly can drive strong favorable variance. Major cost structure changes due to higher facility fees or expansions can lead to significant negative variance.

Favorable variance is rarely a concern, but ideally a business is able to mitigate substantial differences between projections and actual results. Major negative variance can leave the company in a difficult position going forward. Major positive variance may cause the company to miss opportunities to better allocate resources or take advantage of new opportunities.

Warning

  • Internal politics can affect budgeting strategies among department leaders in a business, which can contribute to relatively high budget variance.

Promoted By Zergnet

Comments

You May Also Like

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!