Variance is the difference between a planned or budgeted financial figure and the actual result achieved. In FP&A, variance analysis identifies where performance deviated from expectations, categorising differences as favourable (better than plan) or adverse (worse than plan) to drive corrective action.
Formula
Variance = Actual - Budget; Variance % = (Actual - Budget) / Budget x 100In Depth
Variance analysis is the detective work of FP&A. It answers the fundamental question: "Why did actual results differ from what we planned?" By decomposing variances into their root causes, finance teams can identify operational issues, validate assumptions, and improve future planning accuracy.
Variances are classified as either favourable or adverse. A favourable variance occurs when actual results are better than planned — higher revenue or lower costs. An adverse variance indicates underperformance — lower revenue or higher costs than budgeted. The classification depends on the line item: for revenue, actual exceeding budget is favourable; for costs, actual falling below budget is favourable.
Variance can be expressed in absolute terms (£) or as a percentage of the budgeted amount. Both are useful: absolute variance shows the financial impact, while percentage variance helps compare the significance across line items of different sizes.
Advanced variance analysis breaks down deviations further. Price variance isolates the impact of unit price changes, while volume variance captures the effect of selling more or fewer units. Mix variance accounts for changes in product or customer mix. This decomposition is particularly valuable for businesses with multiple product lines or revenue streams.
Best-practice FP&A teams set materiality thresholds — for instance, investigating any variance exceeding £10,000 or 5% of budget. This prevents analysts from wasting time on immaterial fluctuations while ensuring significant deviations receive prompt attention.
For UK businesses, common sources of variance include exchange rate movements, changes in employer National Insurance contributions, unexpected VAT adjustments, and seasonal demand shifts.
Real-World Example
A Bristol-based manufacturer budgeted £800,000 in Q3 revenue but achieved £740,000, creating an adverse variance of £60,000 (–7.5%). Analysis reveals £35,000 was due to a delayed product launch (volume variance) and £25,000 from competitive pricing pressure (price variance). The FP&A team adjusts the Q4 forecast accordingly.
Related Terms
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