Variances

Variances

1. Difference between actual & budget figures

   • A variance means the business is performing worse or better than expected.
   • Favourable variance leads to increased profit, revenue more than budget, costs lower than budget.
   • Adverse variance, reduce profits, selling fewer items, spending more on adverts than budget.
   • Add up to become a cumulative variance.
   • Can be calculated for each budget each month.

2. Can be bad, even when they say your doing better than expected

   • Need to know why they occurred.
   • Important to spot adverse variance as soon as possible, which budget holder is responsible, take action.
   • Should investigate favourable variances, budget targets weren't stretching enough. Is one department doing something right, can spread this throughout the organisation.

3. Factors

   • External
     • Competitor behaviour, changing fashions, changes in economy, cost of raw materials.
   • Internal
     • Improving efficiency, overestimation on amount it can save, underestimate costs, changing selling price, communication may need improvement.

4. Identifying & explaining

   • Analysis means spotting the variance & figuring out why they've happened.
   • Small variances aren't a massive issue, they can help motivate employees.
   • Large variances can demotivate, task may seem impossible.

5. Have to do something

   • Beware of chopping & changing budget too much.
   • Changing removes certainty.
   • Altering budgets can make them less motivating.
   • Fix adverse when they can change marketing mix, streamlining production to be more efficient, motivate employees, asking suppliers for better deal.
   • Fix favourable, if it is a pessimistic budget they make it more ambitious, if because of increased productivity then they try to spread this.