What is variance analysis?

Variance analysis compares actual results with a budget, forecast or other baseline and investigates the reasons for the differences. It turns a reported gap into an explanation that a team can act on.

For a distributor, a revenue variance might reflect changes in sales volumes, selling prices, customer activity or product mix. An expense variance might reflect timing, operating activity or a change in cost. The useful question is not only how far performance moved, but what caused the movement.

Using an actual-minus-budget convention: variance = actual result − budget result. For a positive, non-zero budget, percentage variance = (actual result − budget result) ÷ budget result × 100. State the convention so readers interpret the sign consistently.

Illustrative example: a branch budgets revenue of $200,000 and records $180,000. The variance is −$20,000, or −10%. If it budgets freight expense of $12,000 and records $15,000, the expense variance is +$3,000, or +25%. A positive difference is not automatically favourable: the interpretation depends on the measure. If the baseline is zero, report the amount and explain the context rather than presenting an undefined percentage.

Start by checking that actuals and the baseline use the same period, account definitions, entity scope and currency. Confirm whether late transactions, one-off adjustments or classification changes explain the gap.

Then drill from the overall result into the relevant branch, customer, supplier, product or account. Separate a timing difference from a lasting change in performance. For sales, compare quantities, prices and product mix instead of assuming lower revenue means every customer bought less. Record the cause, responsible owner and next action. Review the forecast if the change affects the remaining planning period.

Variance analysis explains a difference between results and a selected reference point. Forecasting estimates a future outcome. The two processes support each other: an explained variance can reveal that a forecast assumption needs updating.

A report should make the comparison explicit. Actual versus budget tests performance against the plan. Actual versus forecast tests performance against the latest expectation. Actual versus last year highlights a change from a previous period. These comparisons answer different questions and should retain their own labels.

Phocas connects financial and operational data so teams can compare performance and drill into the transactions and business dimensions behind a reported difference. Phocas Financial Statements and Phocas Budgets & Forecasts support financial reporting and planning alongside that investigation.

The purpose of a variance review is to identify a cause and a useful response. Agree a practical review threshold with the business, explain material changes in plain language and keep ownership visible rather than producing commentary that merely repeats the numbers.