What is the purpose of variance analysis and how can it help businesses?

What is variance analysis

What is Variance Analysis?

Variance analysis is a financial analysis tool that compares actual results to expected results.

It helps businesses identify the reasons for the variances and take corrective actions to improve performance.

Getting Started

If you are a business owner, manager, or accountant, it is essential to learn variance analysis.

It can help you identify the areas where your business is underperforming and make informed decisions to improve profitability and efficiency.

Who is it for?

Variance analysis is for anyone who wants to improve their financial performance, including:

• Business owners
• Managers
• Accountants
• Financial analysts

How to

1. Define the budget or standard for the performance metric you want to analyze.
2. Collect the actual data for the same performance metric.
3. Calculate the variance by subtracting the actual value from the budgeted value.
4. Analyze the variance to identify the reasons for the difference.
5. Take corrective actions to improve performance based on the analysis.

Best Practices

• Set realistic budgets or standards based on historical data and market trends.
• Regularly monitor and analyze variances to identify trends and patterns.
• Involve all stakeholders in the variance analysis process to ensure buy-in and ownership.
• Use variance analysis as a continuous improvement tool rather than a one-time event.

Examples

Let’s consider an example of a retail store that wants to analyze the variance in its sales revenue for the month of January.

Manager: Hi, I want to analyze the variance in our sales revenue for January.

Can you help me with that?

Accountant: Sure, do you have the budgeted sales revenue for January?

Manager: Yes, it was $100,000.

Accountant: Great.

And what was the actual sales revenue for January?

Manager: It was $90,000.

Accountant: Okay, so the variance is $10,000.

Let me analyze the variance to identify the reasons for the difference.

After analyzing the variance, the accountant found that the store had a lower than expected footfall due to bad weather and a decrease in marketing efforts.

The accountant recommended increasing marketing efforts and offering promotions to attract customers.

Manager: Thank you for your help.

I will implement these recommendations and monitor the sales revenue for February.

Originally published at Smart Accounting Kit.
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