What does variance analysis involve?

Variance analysis involves comparing budgeted figures to actual figures. This financial management tool helps organizations understand the differences between what was planned (the budget) and what was actually incurred (the actuals) in terms of revenues and expenses. The primary purpose of variance analysis is to identify the reasons for discrepancies, which can provide valuable insights into financial performance and operational efficiency.

By assessing these variances, management can make informed decisions regarding resource allocation, operational improvements, and future budgeting processes. This practice allows organizations to adjust their strategies based on actual performance and maintain better control over financial outcomes. Variance analysis is crucial in helping businesses to understand their financial health and guides them in making necessary adjustments to meet their strategic goals.