Your client makes money and spends money. It also, with your help, probably made a budget to plan the current year. As the year progresses, you’ll likely present your client with reports that compare actual results with budgeted amounts. If the actual amounts are better than the budget, your client has a favourable budget variance.
Think about your client’s revenue. Say it planned to make $10,000 of revenue each month. Three months into the year, it’s collected $35,000. Because the actual revenue is higher than the budgeted amount of revenue up until that point, revenue has a favourable budget variance of $5,000.
Alternatively, your client planned to spend $500 per month on general repairs and maintenance. Three months in, it’s only spent $900 total. Because expenses are lower than the budgeted amount, this account has a favourable budget variance of $600.
Your clients should try and leverage their favourable budget variances to understand why things are going well. In the example above, your client should be able to explain why it isn’t spending as much money on general repairs. Does this mean your client can hold off on buying new equipment, or it hasn’t been using equipment as often as it should? Favourable budget variances go deeper than what is being spent. There’s usually a cost driver affecting them, so your client is either making more money or spending less money than planned.
Ideally, things go better than planned for your clients. If this is the case, you’ll see favourable budget variances when you compare your client’s actual results to the budget.