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Budgets are an important and necessary part of any business venture. For effective financial planning, you not only need to prepare a budget beforehand but also periodically review how well you’re sticking to that budget. Budget variance analysis focuses on the differences between what you had planned and what actually happened. While the calculations involved in obtaining the variances are very simple, the analysis and interpretation of these variances are more complex.

In this article, you will learn about budget variance analysis and why you should do it. You will also learn how to carry out budget variance analysis: from doing the budget variance calculations to reporting your findings on the variance analysis. Additionally, you will learn how Google Sheets and Layer can help you automate this process and get updated budget data as often as you need it.

What is Budget Variance Analysis?

Budget variance analysis is concerned with the difference between budgeted and actual values for a given period of time. By analyzing the variances for specific products, customers, and vendors, you can monitor and improve performance, as well as catch potential problems early.

The more you break down your budget into individual items, the more useful the analysis will be. If you group items together, it’s possible that you’ll miss important variances, as the performance of some items could be compensating for others. Spreadsheet software like Excel or Google Sheets can help you do this efficiently and regularly.

What is the Purpose of a Budget Variance Report?

Budget variance reports allow you to investigate interesting or worrying differences between the expected and the actual. The finance team needs to provide possible explanations for these variances. In some cases, this may require digging deeper into specific aspects to investigate potential problems or opportunities.

Doing research on anomalous or unexplained budget variances can be time-consuming, so it’s important to first determine whether a particular variance is worth investigating. It’s not a pleasant subject, but it can help you avoid serious consequences, such as small-time fraud. By doing variance analysis regularly, you’re more likely to catch discrepancies in your budget earlier, limiting the damage to your company.

How Do You Calculate Budget Variance?

Budget variances are calculated by subtracting the actual values for each line item from the budgeted value for that line item. This will get you a positive result if the real value is lower than you expected and a negative result if it’s higher than expected.

Budget variance = Budget value - Actual value

Some prefer to reverse the polarity by subtracting the budgeted from the actual, giving you a negative result if the value is lower than you expected. While either will work equally well, it’s very important to be consistent in their use –that’s exactly why we recommend automating this process.

Now that you know how the variance is calculated let's have a look at the steps involved in the analysis itself.

1. Gather data

First, you need to gather all the relevant data in one file. This includes the originally budgeted values and the actual values for all line items.

2. Calculate variance

Once you have your data, you need to subtract the actual value from the budgeted value for each line item.

3. Analyze variance

Now that you have the variances, you need to look for any discrepancies and figure out the cause. Most are easily explained by external changes that you don’t control - price changes, competitor strategies, etc. - but some may require more extensive research.

4. Report findings

Finally, you need to build a report summarizing your analysis, including any suggestions or recommendations based on your research.

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How to Calculate Budget Variance in Google Sheets?

While the calculations involved are extremely simple - just subtraction, in fact - you should not attempt to do budget variance analysis manually. This greatly increases the chances of mistakes that could easily be avoided.

Using Google Sheets, you can set up templates to fix the structure and the formulas for the calculations. Templates can also be used for the layout and formatting of the final report. Adding a tool like Layer lets you automate the process from collecting the initial data to sharing the final report.

  1. 1. In Google Sheets, set up a table with the budget items in separate rows in the first column.
Budget Variance Analysis The Complete Guide Add Budget Line Items
Budget Variance Analysis: The Complete Guide - Add Budget Line Items
  1. 2. The second and third columns will contain the budgeted and actual values, respectively.
Budget Variance Analysis The Complete Guide Add Budget and Actual Columns
Budget Variance Analysis: The Complete Guide - Add Budget and Actual Columns
  1. 3. The fourth column will contain the variances, so you need to subtract “actual” from “budget”.
Budget Variance Analysis The Complete Guide Add Variance Formula
Budget Variance Analysis: The Complete Guide - Add Variance Formula
  1. 4. Copy the formula down to all the rows in the “variance” column.
Budget Variance Analysis The Complete Guide Copy Formula Down
Budget Variance Analysis: The Complete Guide - Copy Formula Down

Now that you have the variances, you can take advantage of Sheets’ conditional formatting options to spot discrepancies quickly. In the next section, you can see how this works with an example.

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Budget Variance Analysis Example

Company X is doing a budget variance analysis to see to what extent they are sticking to their budget. They have all the information necessary for this analysis, such as a comprehensive list of budget items, together with the predicted and actual values.

1. Gather data

In a Google Sheets file, I have added the budgeted and actual values for income and expense items. Remember that the more you can break it down into individual items, the more useful and accurate your analysis will be.

Budget Variance Analysis The Complete Guide Gather Budget and Actual Values
Budget Variance Analysis: The Complete Guide - Gather Budget and Actual Values

2. Calculate variance

Now, I subtract the actual value from the budgeted value to get the variance.

Budget Variance Analysis The Complete Guide Calculate Variance
Budget Variance Analysis: The Complete Guide - Calculate Variance

3. Analyze variance

You can use conditional formatting rules to highlight interesting variances. Since negative results mean different things when applied to income or expenses, you can create color-highlighting rules to aid visualization. Remember to contextualize your results to avoid misleading conclusions.

Below, I have added green highlighting to the income values when they are negative, as this means I earned more than I expected. I have also added green highlighting to positive expense values, as this means we spent less than we expected. To learn more, check out this article on how to use conditional formatting in Google Sheets.

Budget Variance Analysis The Complete Guide Analyze Variance
Budget Variance Analysis: The Complete Guide - Analyze Variance

4. Final report

The layout and contents of the final report will depend on the company’s requirements and conventions. However, it should include a summary of your findings and the corresponding budget variance explanations.

You can use a Startup Business Budget template to get you started and customize it to fit your needs. The template includes a budget variance report with all the necessary links and formulas. Alternatively, you can use a simpler structure like the one in the previous section.

How to automate your FP&A on top of Google Sheets?

Layer is an add-on that equips finance teams with the tools to increase efficiency and data quality in their FP&A processes on top of Google Sheets. Share parts of your Google Sheets, monitor, review and approve changes, and sync data from different sources – all within seconds. See how it works.

Using Layer, you can:

  • Share & Collaborate: Automate your data collection and validation through user controls.
  • Automate & Schedule: Schedule recurring data collection and distribution tasks.
  • Integrate & Sync: Connect to your tech stack and sync all your data in one place.
  • Visualize & Report: Generate and share reports with real-time data and actionable decisions.

Limited Time Offer: Install the Layer Google Sheets Add-On today and Get Free Access to all the paid features, so you can start managing, automating, and scaling your FP&A processes on top of Google Sheets!

Conclusion

As you have seen, budget variance analysis can greatly benefit your company. Studying the differences between the actual and the expected can help you identify strengths and weaknesses, as well as opportunities. If you’d like to know more about how to account for different types of costs, check out our articles on How To Find Variable Cost and How To Find Fixed Cost.

You now know the benefits of regular budget variance analysis, as well as how to perform it. You also know how to use Google Sheets to calculate the variances and how Layer can help you automate the process. To learn more about other useful types of financial analysis, read the following:

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Maria Del-Olmo
Originally published Sep 27 2022, Updated Nov 11 2022