Budget variances are common in financial planning and budgeting processes, resulting in discrepancies between budgeted and actual figures. These variances can be attributed to various factors, including errors in budget creation, changing business conditions, unmet expectations, and operational issues.
Key Facts
- Errors in Budget Creation:
- Budget variances can occur due to errors made during the budget creation process, such as faulty math, using incorrect assumptions, or relying on outdated or inaccurate data.
- These errors can lead to discrepancies between the budgeted and actual figures.
- Changing Business Conditions:
- Budget variances can also arise from changing business conditions, including shifts in the overall economy or global trade.
- Factors such as increased raw material costs or the entry of new competitors can impact budgeted expenses and revenues.
- Political and regulatory changes that were not accurately forecasted can also contribute to budget variances.
- Unmet Expectations:
- Variances in budgets can occur when the management team exceeds or underperforms expectations.
- Expectations are based on estimates and projections, which rely on the values of inputs and assumptions built into the budget.
- As a result, variances are common and can deviate from the budgeted figures.
- Operational Issues:
- Operational issues can cause budget variances by introducing inefficiencies or problems in project execution or management.
- Delays, errors, conflicts, poor performance, turnover, or absenteeism can lead to wasted time, money, or resources, as well as lower quality or quantity of outputs or outcomes.
- Implementing best practices, standards, controls, providing training and support, and evaluating and improving performance can help resolve operational issues.
Errors in Budget Creation
Errors during budget creation can lead to budget variances. These errors may include faulty mathematical calculations, incorrect assumptions, or reliance on outdated or inaccurate data. Such errors can result in discrepancies between the budgeted figures and the actual financial outcomes.
Changing Business Conditions
Budget variances can also arise from changing business conditions. Shifts in the overall economy, global trade, or industry dynamics can impact budgeted expenses and revenues. For instance, increased raw material costs or the entry of new competitors can affect the accuracy of the budget. Additionally, political and regulatory changes that were not accurately forecasted can contribute to budget variances.
Unmet Expectations
Variances in budgets can occur when the management team exceeds or underperforms expectations. Expectations are based on estimates and projections, which rely on the values of inputs and assumptions built into the budget. As a result, variances are common and can deviate from the budgeted figures.
Operational Issues
Operational issues can cause budget variances by introducing inefficiencies or problems in project execution or management. Delays, errors, conflicts, poor performance, turnover, or absenteeism can lead to wasted time, money, or resources, as well as lower quality or quantity of outputs or outcomes. Implementing best practices, standards, controls, providing training and support, and evaluating and improving performance can help resolve operational issues.
References:
- Chen, J. (2020, November 30). Budget Variance: Definition, Primary Causes, and Types. Investopedia. https://www.investopedia.com/terms/b/budget-variance.asp
- Finance Division. (n.d.). Types of variances. University of Cambridge. https://www.finance.admin.cam.ac.uk/policy-and-procedures/financial-procedures/chapter-2-budgetary-planning-control/monitoring-and/types
- Campbell, W. (2023, November 9). How to Manage Budget Variances in Program Coordination. LinkedIn. https://www.linkedin.com/advice/1/what-most-common-reasons-budget-variances-wwm2e
FAQs
What are the common causes of budget variances?
Budget variances can be caused by errors in budget creation, changing business conditions, unmet expectations, and operational issues.
How can errors in budget creation lead to variances?
Errors such as faulty math, incorrect assumptions, or reliance on outdated data during budget creation can result in discrepancies between budgeted and actual figures.
How do changing business conditions affect budget variances?
Shifts in the economy, global trade, or industry dynamics can impact budgeted expenses and revenues. For example, increased raw material costs or new competitors can affect the budget’s accuracy.
What role do unmet expectations play in budget variances?
Variances occur when the management team exceeds or underperforms expectations based on estimates and projections in the budget.
How can operational issues cause budget variances?
Operational issues like delays, errors, conflicts, or poor performance can lead to wasted resources and lower quality outputs, resulting in budget variances.
What are some examples of operational issues that can cause budget variances?
Examples include delays in project execution, errors in project management, conflicts among team members, poor performance, high turnover, or absenteeism.
How can companies minimize budget variances caused by operational issues?
Implementing best practices, standards, and controls, providing training and support, and evaluating and improving performance can help reduce variances caused by operational issues.
Why is it important to understand the causes of budget variances?
Understanding the causes of budget variances helps companies identify areas where they can improve their budgeting process, reduce errors, and make more accurate forecasts, leading to better financial planning and control.