What does a budget variance represent?

A budget variance represents the difference between what was planned in a budget and what has actually occurred in terms of financial performance. It is a key metric used by businesses to assess performance and financial health.

When a budget is created, it includes projections for income, expenses, and other financial activities. After a period of operation, actual figures are collected and compared against the budgeted figures. The result of this comparison is the budget variance, which can be favorable or unfavorable. A favorable variance occurs when actual revenue exceeds budgeted revenue, or actual expenses are lower than expected. Conversely, an unfavorable variance arises when actual expenses exceed budgeted expenses or when revenue falls short of expectations.

Understanding budget variances allows managers and stakeholders to make informed decisions regarding operational adjustments, budget reallocations, and strategic planning. Being able to identify and analyze these variances is crucial for effective financial management and helps ensure that the organization stays on track to meet its financial goals.