What is a Budget Variance?
A budget variance refers to the difference between what was budgeted and what was actually spent or earned during a specific period. It is a key financial metric used primarily in budgeting and financial planning.
Types of Budget Variance
- Favorable Variance: Occurs when actual revenues exceed budgeted amounts or actual costs are less than budgeted costs. This indicates a positive performance as it contributes to increased profits or savings.
- Unfavorable Variance: Occurs when actual revenues fall short of budgeted amounts or actual costs exceed budgeted costs. This indicates a negative performance and may prompt a reassessment of spending habits or revenue strategies.
Why is Budget Variance Important?
Understanding budget variances is crucial for effective financial management. It helps individuals and organizations identify areas where they are overspending or underperforming. Analyzing these variances can lead to better decision-making and improved financial health.
Conclusion
In summary, a budget variance is a vital tool in personal finance that allows for ongoing assessment of financial performance against planned budgets. By regularly monitoring variances, one can make informed adjustments, ensuring financial goals are met.