What is variance analysis? A founder's guide to tracking financial performance

What is variance analysis?

Variance analysis is the process of comparing your planned financial performance (what you budgeted or forecasted) against your actual results. It answers a simple but critical question: why did our numbers turn out differently than expected?

When you conduct variance analysis, you're identifying where reality diverged from your plan. Did you overspend on marketing? Underestimate production costs? Miss revenue targets in a key market? Each variance figure tells part of the story.

This practice goes beyond spotting problems. It's about understanding your business performance at a granular level so you can make informed decisions quickly. For small businesses and startups operating with tight budgets and limited runways, effective variance analysis can mean the difference between sustainable growth and unexpected cash flow gaps.

Benefits of variance analysis

Variance analysis gives founders and finance teams clarity on financial performance. Here's why it matters:

Spot problems before they escalate

Catching an unfavourable variance early, like rising variable overhead costs or declining actual sales, lets you course-correct before it impacts your bottom line.

Understand what's working

A favourable variance (revenue exceeding targets or costs coming in under budget) shows where your strategy is paying off. Double down on what's driving results.

Improve forecasting accuracy

Reviewing variances regularly sharpens your ability to predict future performance. You'll build better budgets based on what actually happens, not optimistic projections.

Make faster, smarter decisionsWhen you know exactly where variances are occurring, by team, product line, or market, you can allocate resources more strategically and adjust quickly.

Build investor and stakeholder confidence

Demonstrating that you actively track, analyse, and respond to budget variance signals operational maturity. It shows you're managing performance proactively, not just hoping for the best.

Types of variances

Different parts of your business generate different types of variances. Understanding each helps you pinpoint where to investigate further.

Revenue/sales variance

This measures the gap between your projected revenue and actual sales. If you forecasted SGD $500,000 in sales but only hit SGD $425,000, you have an unfavourable variance of SGD $75,000.

Common causes: Lower-than-expected customer demand, pricing adjustments, delays in closing deals, or seasonal fluctuations you didn't account for.

Cost of goods sold (COGS) variance

COGS variance tracks the difference between budgeted production costs and actual costs. This includes raw materials, labour directly tied to production, and variable overhead costs, such as manufacturing overhead directly tied to output.

Example: If you budgeted SGD $200,000 for materials but spent SGD $230,000 due to supplier price increases, that's a SGD $30,000 of unfavourable material variance.

Operating expense variance

Operating expenses, marketing, rent, software subscriptions, and non-production salaries can drift from your budget quickly. An operating expense variance shows whether you overspent or underspent in these areas.

Common causes: Unplanned hires, higher-than-expected ad costs, or surprise fees from third-party tools.

Profit variance

This is the ultimate variance: the gap between your expected profit and your actual profit. It's influenced by both revenue and cost variances, making it a high-level indicator of overall variance in business performance.

Cash flow variance

Even if your profit looks healthy on paper, cash flow variance reveals whether money is actually moving in and out as planned. Late customer payments, upfront vendor costs, or seasonal dips can all create cash flow gaps.

For startups managing runway, cash flow variance analysis is critical. It shows whether you're burning cash faster than forecasted.

Labour variance

Labour variance measures the difference between your budgeted labour costs and actual labour costs. It helps you understand whether changes are driven by pay rates, productivity, or both.

In practice, labour variance is usually broken down into two components:

• Labour rate variance: Occurs when the actual hourly wage or salary differs from what you budgeted. This can be caused by hiring more senior talent than planned, wage inflation, overtime premiums, or changes in contractor rates.
  
• Labour efficiency variance: Occurs when the actual number of hours worked differs from what you expected for the same level of output. This may point to productivity issues, process inefficiencies, rework, or underestimating project complexity.
  

Example: If you budgeted 100 development hours at SGD $50 per hour (SGD $5,000 total), but the work took 120 hours at the same rate, the additional SGD $1,000 represents an unfavourable labour efficiency variance.

If the work took 100 hours but at SGD $60 per hour, the SGD $1,000 difference would be an unfavourable labour rate variance.

For startups and SMEs, tracking both components matters. Rising labour costs may not always signal poor productivity; they may reflect strategic hiring decisions. Labour variance analysis helps you distinguish between the two so you can respond appropriately.

Variance in key ratios

Beyond dollar amounts, variances can appear in financial ratios like gross margin, operating margin, or customer acquisition cost (CAC). Tracking these helps you understand shifts in efficiency and profitability over time.

How to calculate variance

Calculating variances is straightforward. The basic variance analysis formula is:

Variance = Actual Result − Budgeted Amount

If the result is positive and you're looking at revenue, that's favourable. If the result is positive and you're analysing costs, the variance is unfavourable because you spent more than planned.

Let's break it down with examples:

[Table:1]

This table shows how variance figures reveal where your plan diverged from reality. You overspent on COGS, came in under budget on marketing, but still missed your profit target due to lower revenue.

A note on variance formulas and materiality

When calculating variances, consistency matters more than the specific formula you use.

As mentioned above, variance is calculated using the standard accounting convention: Variance = Actual result − Budgeted amount. However, some accounting software and finance teams reverse the formula for expenses so that a positive number always appears favourable. Neither approach is wrong, as long as you apply it consistently across your reports and understand what the numbers represent.

Just as important is deciding which variances are worth investigating. In professional finance and auditing, this concept is known as materiality, meaning that not every variance requires analysis. For example, an SGD $10 overspend on an SGD $10,000 budget is usually noise, while a 10% variance or a five-figure gap deserves attention.

Effective variance analysis focuses on variances that are material, meaning they are significant in absolute value, percentage terms, or strategic impact. This keeps founders focused on what actually affects performance, cash flow, and runway.

Key steps in conducting variance analysis

Once you've calculated the numbers, follow this variance analysis process:

1. Identify significant variances

Not every variance needs deep investigation. Focus on significant variances, those that meaningfully impact your financial performance or signal a trend.

2. Determine whether variances are favourable or unfavourable

A favourable variance means you're outperforming expectations. An unfavourable variance signals a problem that needs attention.

3. Investigate root causes

Dig into why the variance occurred. Was it an internal issue (inefficiency, pricing decision) or external (market shift, supplier price hike)?

4. Take action

Use your findings to adjust budgets, reallocate resources, or change strategy. The goal of analysing variance is to drive better decisions, not simply report numbers.

5. Monitor trends over time

One-off variances happen. Patterns matter more. Monthly variance analysis helps you spot recurring issues and track whether corrective actions are working.

Standard vs flexible budget variance

When integrating variance analysis into your financial planning, you'll encounter two types of budgets.

Standard budget variance

A standard budget variance compares actual results against a fixed, predetermined budget. This works well when your business operates at a consistent scale and conditions are stable.

Example: You budgeted SGD $300,000 in revenue for Q1. Actual revenue came in at SGD $280,000. The variance is -SGD $20,000.

Flexible budget variance

A flexible budget adjusts based on actual activity levels. If you planned to produce 10,000 units but only produced 8,000, your flexible budget recalculates expected costs and revenue based on that lower output.

This approach is useful for startups and SMEs where production or sales volumes fluctuate significantly. It separates volume variance (changes due to activity levels) from price variance (changes due to cost or pricing shifts).

What causes variance? Root causes to investigate

Understanding why variances happen is as important as identifying them. Here are the most common drivers:

Internal causes

• Pricing changes: You adjusted prices mid-quarter, impacting revenue or margins.
  
• Operational inefficiencies: Production took longer than expected, driving up labour costs and creating an efficiency variance.
  
• Budget inaccuracies: Your initial budget was overly optimistic or didn't account for realistic costs.
  
• Staffing changes: Unplanned hires, turnover, or increased hours led to higher variable overhead costs.
  

External causes

• Market conditions: Demand shifted due to economic factors, seasonality, or competitor moves.
  
• Supplier price increases: Your raw materials or variable overhead costs rose due to supply chain pressures.
  
• Currency fluctuations: For businesses operating across borders, FX shifts can create variances in both revenue and expenses.
  
• Regulatory changes: New compliance requirements increased fixed overhead variance or operating costs.
  

One-off events

• Unexpected repairs or equipment failure: A one-time expense that wasn't in your budget.
  
• Large refunds or chargebacks: Impacting actual sales and cash flow.
  
• Legal or settlement costs: One-time hits to operating expenses.
  

Conducting root cause analysis helps you determine whether a variance is a warning sign or just noise.

How to use variance analysis for decision-making

Variance analysis compares your plan against reality, but its real value lies in what you do next. Here's how to turn insights into action:

Operational adjustments

If your overall labour variance is consistently unfavourable, investigate whether you're overstaffed, underutilising talent, or dealing with inefficiencies. Adjust team structure or workflows accordingly.

Strategic planning

Reviewing variances over multiple periods reveals trends. If actual production consistently falls short of forecasts, you may need to rethink capacity planning or supplier relationships.

Cash flow and runway management

For startups, cash flow variance analysis is critical. If you're burning cash faster than budgeted, you need to either cut costs, accelerate revenue, or adjust your fundraising timeline.

Performance evaluation

Use variance analysis to assess team and departmental performance. Are sales teams hitting targets? Is marketing spend driving expected returns? Is production efficiency improving?

Variance analysis in financial statements

Variance analysis goes beyond budgeting exercises; it's baked into how you review financial statements.

Profit and loss (P&L) variance reports

Compare your budgeted P&L against actual results line by line. This highlights where revenue fell short, which expenses exceeded expectations, and how financial performance diverged from your plan.

Balance sheet variances

Variances in assets, liabilities, and equity can signal shifts in working capital, unexpected debt, or changes in inventory levels. For example, if accounts receivable spiked, it might indicate slower customer payments.

Cash flow variance

Your cash flow statement shows actual cash movement. Conducting variance analysis here reveals whether cash is coming in and going out as expected, or if there are timing mismatches creating liquidity pressure.

Using variance to adjust forecasts

The best part of monthly variance analysis? It makes your next forecast better. Adjust future budgets based on what you've learned, incorporating realistic assumptions about costs, revenue, and market conditions.

10 tips to effectively track variance

To make effective variance analysis a habit, follow these best practices:

• Run monthly variance analysis: Don't wait until quarter-end. Monthly reviews catch issues while there's still time to act.
  
• Focus on significant variances first: Not every SGD $500 variance needs investigation. Set thresholds (e.g., 10% or SGD $5,000) to prioritise further analysis.
  
• Track both favourable and unfavourable variances: Understanding what's working is as valuable as spotting problems.
  
• Dig into volume vs. price variances: Separate whether variances are due to selling or producing less (volume variance) or changes in cost or pricing (price variance).
  
• Use real-time data: Manual spreadsheets lag. Automate where possible to track actual overhead, actual price, and spending as it happens.
  
• Involve department heads: Sales, ops, and finance should collaborate on reviewing variances to get the full context.
  
• Document assumptions in your budget: When you know what you assumed, it's easier to identify where reality diverged.
  
• Compare against flexible budgets when relevant: If your activity levels change significantly, a flexible budget gives more accurate variance insights.
  
• Review variances against industry benchmarks: Context matters. A 5% cost variance might be normal in your sector or a red flag.
  
• Close the loop with action items: Every variance analysis process should end with clear next steps, whether that's adjusting spend, renegotiating contracts, or revising forecasts.
  

Common mistakes in variance analysis

Even with the best intentions, founders and finance teams can stumble. Avoid these pitfalls

• Ignoring small variances that compound over time: An SGD $2,000 overspend might seem minor, but if it repeats every month, that's SGD $24,000 by year-end.
  
• Treating all variances as problems. A favourable variance in marketing spend might mean you underspent and missed growth opportunities. Don't just celebrate savings; ask if you left value on the table.
  
• Focusing only on dollar amounts, not percentages. An SGD $10,000 variance on a SGD $1 million budget is negligible. The same variance on an SGD $50,000 budget is significant.
  
• Failing to investigate root causes. Simply noting that you overspent doesn't help. Dig into why the variance occurred so you can prevent it next time.
  
• Not adjusting forecasts based on learnings. If you consistently overestimate revenue or underestimate costs, your budgets aren't grounded in reality. Use analysis of variance to build smarter forecasts.
  

Variance analysis for Singapore startups and SMEs

For founders building in Singapore and expanding across Southeast Asia, variance analysis has unique considerations:

Multi-currency operations

If you're earning revenue in SGD, USD, and MYR while paying suppliers in different currencies, FX fluctuations can create significant price variance. Track this separately to understand true operational performance vs. currency impact.

Regulatory and compliance costs

Singapore’s regulatory environment is robust and predictable, but compliance costs can still vary as businesses scale or expand cross-border.

Talent costs

Labour markets in Singapore are competitive. If your overall labour variance consistently trends unfavourably, it might reflect rising salaries or difficulties hiring at budgeted rates.

Cross-border expansion

When scaling into new markets, your budgeted fixed overhead and variable costs will shift. Run separate variance analyses by geography to understand performance in each market.

GST impact on pricing and expense variances

Since Singapore’s GST rate increased to 9% from 2024, founders using GST-inclusive pricing models may see unfavourable revenue or margin variances if the change was not fully reflected in budgets.

For example, if your prices remained GST-inclusive while supplier invoices increased due to the higher GST rate, your actual costs may exceed budget even though the underlying spending behaviour has not changed. This can show up as:

• Unfavourable operating expense variance
  
• Lower-than-expected gross margin variance
  

To avoid false signals, ensure your budgets clearly separate net costs from GST, and revisit pricing assumptions after tax changes.

Enterprise Singapore grants and “Other income” variances

Government support can also drive favourable variances. Grants from Enterprise Singapore, such as productivity, innovation, or market expansion grants, often appear as Other income in financial statements.

If grant disbursements are received earlier than expected or exceed budgeted amounts, they can create favourable income or cash flow variances. Without proper tracking, these one-off inflows may distort operating performance analysis.

Best practice is to:

• Budget ESG grants conservatively
  
• Track grant income separately from core operating revenue
  
• Flag grant-related variances as non-recurring, so they do not inflate ongoing performance expectations
  

For Singapore founders, recognising the impact of GST changes and government support ensures variance analysis reflects true business performance, not accounting noise.

Tools and templates for variance analysis

You don't need expensive software to start. Here's what works:

Manual templates

• Excel or Google Sheets: Build a simple variance tracker with columns for budgeted amounts, actual results, variance, and variance percentage. Use conditional formatting to highlight significant variances.
  
• Downloadable templates: Many finance blogs offer free variance analysis templates. Customise them to fit your business structure.
  

Automated tools

• Accounting software: Platforms like Xero, QuickBooks, or Aspire can generate variance reports automatically by comparing actual transactions against budgets.
  
• Financial dashboards: Tools that integrate with your accounting system provide real-time variance tracking, helping you spot issues as they happen.
  
• Aspire's finance platform: Built for founders operating globally, Aspire gives you real-time visibility into spending, multi-currency transactions, and cash flow, making monthly variance analysis faster and more accurate.
  

How Aspire helps with variance analysis

Managing variance analysis gets harder as you scale across borders. Multiple currencies, fragmented tools, and delayed data slow you down.

Aspire simplifies this. With real-time expense management and multi-currency support, you get instant visibility into actual overhead, operating expenses, and cash flow. You can set budgets by team, project, or market, then track variances as they happen, not weeks later.

For startups and SMEs managing tight runways, this speed matters. Spotting an unfavourable cost variance early means you can act before it impacts your cash position. And when you're ready to scale, Aspire's platform grows with you, helps you with cost control, giving you the financial clarity you need to make confident decisions.

Ready to track financial performance with confidence? Aspire gives you the tools to manage budgets, track spending in real time, and scale globally; all from one platform. Explore how Aspire supports global founders.

Frequently asked questions

What is meant by variance analysis?

Variance analysis is the process of comparing budgeted or forecasted financial figures against actual results to identify and understand differences. It helps businesses pinpoint where performance diverged from expectations and why.

What is the formula for variance analysis?

The basic variance analysis formula is: Variance = Actual Result − Budgeted Amount. A positive variance in revenue is favorable, while a positive variance in costs is unfavorable.

What are the four steps in variance analysis?

The four key steps are:

• (1) Calculate variances by comparing actual vs. budgeted figures,
  
• (2) Identify significant variances worth investigating,
  
• (3) Analyse root causes—internal, external, or one-off events, and
  
• (4) Take corrective action and adjust future forecasts based on findings.
  

What is the ANOVA in simple terms?

ANOVA (Analysis of Variance) is a statistical method used to compare means across multiple groups to see if they differ significantly. While related to the concept of variance, ANOVA is primarily a research and data analysis tool, distinct from financial variance analysis.

What are the four types of variance?

Common types include:

• Revenue/sales variance: gaps in expected vs. actual sales,
  
• Cost variance: differences in production or operating costs,
  
• Profit variance: overall profitability gaps, and
  
• Cash flow variance: differences in actual vs. forecasted cash movement.
  

What is a variance analysis in accounting?

In accounting, variance analysis compares actual financial performance against budgets or standards. It's used to assess efficiency, control costs, and improve forecasting accuracy. Accountants rely on it to explain deviations in financial statements and support strategic decision-making.