What is the purpose of variance analysis?

Variance analysis serves the vital purpose of evaluating financial performance by systematically comparing actual results to budgeted amounts. This comparison helps organizations identify discrepancies between expected financial outcomes and the ones that actually occurred. By analyzing these variances, management can understand the underlying reasons for any differences, whether they are favorable or unfavorable.

For example, if actual expenses exceed budgeted figures, variance analysis allows management to investigate what factors contributed to this overage, such as unexpected costs or changes in operational efficiency. This analysis not only highlights areas that need attention but also assists in future budgeting and forecasting by providing insights into historical trends and performance patterns.

In contrast, assessing the reasonableness of projected revenues, evaluating cash flow efficiencies, or tracking daily expenses against cash reserves serve different objectives within financial management but do not encapsulate the broader goal of variance analysis.