# Variance Analysis

## Quick Definition
Comparing actual results to budget and investigating the reasons for differences to improve future forecasting.

## What is Variance Analysis?
Variance analysis compares actual results to budgeted or forecasted amounts and investigates the reasons for differences. It answers: did we hit our plan? If not, why not?

Variances can be favorable (better than expected) or unfavorable (worse than expected). Understanding the root cause matters more than the number.

## Why Variance Analysis Matters
Regular variance analysis improves forecasting accuracy over time. You learn which assumptions were wrong and adjust future forecasts. It also surfaces operational issues early.

A revenue miss might be timing (deals slipping to next month) or structural (market has changed). The response differs dramatically.

## Running Variance Analysis
Compare actuals to budget monthly. Flag significant variances (typically >10%). Investigate root causes. Categorize as timing, one-time, or structural. Update forecasts based on learnings. Share findings with stakeholders. Start with a [pro forma income statement](/content/proforma-income-statement-generator/index.html) as your baseline projection, then measure actual performance against it each month.

## How to Run Variance Analysis Step by Step

**Step 1: Pull your budget vs actuals for the period.**

| Line Item | Budget | Actual | Variance | % |
| --- | --- | --- | --- | --- |
| Revenue | $90,000 | $82,000 | -$8,000 | -8.9% |
| COGS | $18,000 | $16,500 | +$1,500 | +8.3% |
| S&M | $35,000 | $41,000 | -$6,000 | -17.1% |
| R&D | $55,000 | $53,000 | +$2,000 | +3.6% |
| G&A | $12,000 | $14,500 | -$2,500 | -20.8% |

**Step 2: Flag material variances.** Anything over 10% (positive or negative) needs investigation. Here: revenue (-8.9%), S&M (-17.1%), and G&A (-20.8%).

**Step 3: Categorize each variance.**

- Revenue miss: **Structural** — two expected deals slipped to next month (timing) + one customer churned unexpectedly (structural)
- S&M over-spend: **One-time** — unplanned conference sponsorship
- G&A over-spend: **Structural** — legal fees for contract negotiations, likely recurring

**Step 4: Update the forecast.** Timing variances self-correct. One-time variances can be ignored going forward. Structural variances require adjusting future projections.

**Step 5: Present to stakeholders.** Board reports should highlight the 3-5 biggest variances, their causes, and what you're doing about the structural ones.

**Common mistakes founders make:**

- Not having a budget to compare against (you can't do variance analysis without a plan)
- Treating all variances the same (timing vs one-time vs structural require different responses)
- Only investigating negative variances (positive variances contain insights too — why did you beat budget?)
- Not updating the forecast based on variance learnings

## Formula
Variance = Actual - Budget

Variance % = (Actual - Budget) ÷ Budget × 100

Favorable variance: actuals better than budget

Unfavorable: actuals worse than budget

## Example
Your SaaS company reviews monthly budget variance:

- Budgeted revenue: $150,000
- Actual revenue: $135,000
- Variance: ($15,000) or -10%

Root cause: Two large deals slipped to next month ($20K). One unexpected churn ($5K). Early close on three small deals (+$10K).

Net variance: -$15K, but deal slip is timing, not lost revenue.

## Related Terms

[**Zero-Based Budgeting (ZBB)**  
Building budgets from scratch each period, requiring justification for every expense rather than adjusting historical spending.]

[**Scenario Planning**  
Creating multiple financial models with different assumptions to prepare for a range of possible futures.]

[**Revenue Forecast**  
Projecting future revenue based on current trends, pipeline, churn, and expansion assumptions.]