What causes variance between a budget and the actual financial performance?

Variance between a budget and actual financial performance often arises from inaccurate estimates. When preparing a budget, various assumptions are made regarding future revenue, expenses, and other financial aspects. If these estimates are overly optimistic, pessimistic, or not reflective of actual market conditions, this can lead to significant discrepancies between the budgeted figures and what is ultimately achieved. For example, if sales forecasts are overly optimistic, the actual revenue may fall short of the budgeted amount, leading to unfavorable variances.

Inaccurate estimates can stem from a variety of factors, such as changes in market conditions, unexpected increases in costs, or unforeseen changes in consumer behavior. When budgets are based on outdated or incorrect information, they may not provide a reliable framework for financial decision-making, thus highlighting the critical importance of developing accurate estimates in the budgeting process.