What is a budget variance?

A budget variance measures the difference between what was initially planned or budgeted and what actually occurred in terms of income and expenses. Understanding this concept is crucial for effective financial management, as it allows individuals and organizations to analyze discrepancies between their financial expectations and actual performance.

When a budget is created, it outlines the anticipated income and expenses over a specific period. When the actual financial results are compared to the budgeted figures, any differences, whether positive or negative, are termed as budget variances. A positive variance signifies that actual results exceeded expectations, either through higher income or lower expenses, while a negative variance indicates the opposite.

By focusing on the actual financial outcomes relative to the budgeted amounts, one can identify areas that may need further attention, adjustments in spending habits, or revised estimates for future budgeting. This understanding simplifies financial planning and helps in making informed decisions to improve overall financial health.