What is Variance Analysis and how can it help me to improve my business performance?

An important part of business planning is Budgeting and Forecasting Cash-flow, Profits and Asset Accumulation.

Many business owners undertake this exercise regularly – although it is a business management task that requires constant vigilance.

Variance Analysis is the next stage of your ever-ongoing business planning and business management tasks that requires attention when delving into your business performance analysis.

Variance Analysis is the process of critically analysing the variances between your business’s Historic Forecasts and Actual Performance for the same period.

The Variance will give you a lot of information to consider, including the testing of the market place, your business proposition and the capacity of your business to deliver goods and services.

A detailed Variance Analysis allows management to understand why fluctuations occur in a business and what it can do to change the situation and better meet targets.

The most commonly-derived Variances used in Variance Analysis are:

* Sales volume variance

* Purchase price variance

* Labour rate variance

* Variable overhead spending variance

* Selling price variance

* Material yield variance

* Labour efficiency variance

* Variable overhead efficiency variance.

Tracking all of the variances may not be necessary. It depends on the nature of the business.

For example a consulting business which is a service organisation might be primarily concerned with the labour efficiency variance,

while an import business in a competitive market might be mostly concerned with the purchase price variance and quality control.

A helpful tip for business owners is to place effort in the areas of variance analysis that can make the most difference to the company if the underlying issues are rectified.

To your financial prosperity,

Kostas Augerinos

Managing Director/Founder

KAA Australia