10 Essential Questions For Every Budget Variance Analysis

1. What are the Variances? 

Start with the basics but be strategic. Focus on identifying significant variations in key business drivers and metrics. For example, if you’re analyzing sales performance, look beyond the total revenue variance to understand differences in volume, price, and mix.

2. Are the Variances Material? 

Not every difference requires action. Consider both absolute dollar amounts and percentages. A $50,000 variance in office supplies might be less concerning than a $50,000 variance in direct materials, even though the numbers are identical.

3. Do We Care About These Variances? 

This question helps prioritize your analysis. A 2% variance in material costs is likely more important than an 8% variance in cell phone expenses, especially when material costs are a key driver of business performance. Focus on variances that impact strategic decisions or indicate potential problems.

4. What Caused the Variances? 

Dig deep into root causes. Consider both internal and external factors. For example, a revenue shortfall might result from lower sales volume (internal) or unexpected competitor actions (external). Understanding causation helps inform corrective actions.

5. Do We Expect the Variances to Continue? 

Some variances are one-time events, while others signal ongoing trends. A missed customer payment causing a temporary cash flow variance is different from a sustained increase in raw material costs. Your response should vary accordingly.

6. Do We Anticipate the Variances to Worsen or Improve? 

Look forward, not just backward. If a variance is trending in the wrong direction, early intervention might be crucial. Consider creating sensitivity analyses to model potential future impacts.

7. What Will We Do About a Material Variance? 

Develop specific, actionable recommendations. Instead of simply noting that costs are too high, propose targeted solutions, such as “We can reduce material costs by 5% by consolidating suppliers and negotiating volume discounts.”

8. How Long Will the Remedy Take to Effect Change? 

Be realistic about timelines. Some fixes, like adjusting pricing, might show immediate results. Others, like implementing new processes or systems, require longer-term planning and monitoring.

9. How Often Should We Report on the Variance? 

Match reporting frequency to the nature of the variance and its importance. Critical operational metrics might need daily monitoring, while others can be reviewed monthly or quarterly.

10. What is the Risk of Doing Nothing? 

Always consider the consequences of inaction. Sometimes, the cost of fixing a variance might exceed the benefit. Other times, small variances might signal bigger problems that require immediate attention.

These ten questions form a comprehensive framework for analyzing budget variances, but remember the goal isn’t to mechanically work through each question. Instead, use this framework as a guide to develop deeper insights about your business’s performance. 

While some variances may only require a few of these questions to reach a conclusion, others might need you to explore all ten in detail. The key is to remain flexible and adapt your analysis to the specific context of each situation. Source