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Even the best budgets rarely turn out exactly the way that planners expect. Whenever you're planning in advance for a period of time, you'll inevitably make some mistakes in your estimates, and it's important to look closely at the financial variances that result in order to learn from those mistakes and prevent them from happening again in the future. Below, we'll go through the simple process of calculating financial variance and the more difficult question of how to work with the results.

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What to do with variance

Once you've figured out the financial variance, the harder question is what to do with it. In cases involving projected losses, you'll often need to figure out how to handle the added spending beyond the initial budget. That can require spending cuts elsewhere or a boost in overall revenue sources. If it's late in the budget cycle when the variance occurs, it can be difficult to find enough savings to overcome a large negative financial variance. That's why it's important to monitor budgeted vs. actual spending frequently.

Financial variance also plays a role in improving the budget process in the future. Actual data can inform budgeting decisions much better than pure estimates, and although many items will differ greatly from year to year, you can still typically get a better read on spending by looking at recent history.