What is the purpose of variance analysis in business metrics?

Variance analysis is a critical tool in business metrics that involves comparing actual performance to expected performance. The primary purpose of this analysis is to identify discrepancies between what was budgeted or planned and what actually occurred. By understanding these variances, businesses can highlight areas where performance did not meet expectations, whether that’s in revenue, costs, or other financial metrics. This insight allows management to take corrective actions, make more informed decisions, and improve future forecasts and business strategies.

When a company conducts variance analysis, it can further dissect the reasons behind the variances into favorable or unfavorable categories, enabling more focused performance improvements. This evaluation helps businesses adapt their operational tactics or strategic plans to better align with their goals and financial targets. Thus, it plays a pivotal role in driving performance management and enhancing overall business efficiency.