How to Calculate Variance: Formula, Steps, and Use Cases

Table of Contents

What is variance?
Why is variance important for business?
How to calculate variance
What are some common use cases of variance in business
Frequently asked questions on variance (FAQs)

<p>We’ve all heard it: the results may vary.</p>  <p>This isn’t just a saying; it’s a reality that impacts your company’s finances, from revenue and budget to spending. Running a business is a balancing act between expectations and reality. You make forecasts, set spending limits, and hope everything goes according to plan. But let's face it, things rarely go perfectly.</p> <p>Learning how to calculate variance is essential for navigating this uncertainty. It's a crucial tool that helps you measure and understand the difference between your budgeted projections and the actual outcomes.<br><br>Monitoring variance, particularly in spending, is essential. How well you identify and respond to these fluctuations directly influences your ability to set realistic goals and manage company finances effectively.</p> <div class="lh-featured-snippet"> <h2>How to calculate variance</h2> <p>Calculate variance by finding the mean, subtracting the mean from each value, squaring the results, summing them, and dividing by the number of values (for population) or by one less than the number of values (for sample). Variance shows how spread out the data is from the mean.</p> </div> <p>Companies usually use <a href="https://www.g2.com/categories/statistical-analysis" rel="noopener" target="_blank">statistical analysis tools </a>or Microsoft Excel to calculate variances. However, it can be useful to do so manually until you fully understand the process.</p> <p>Let's learn more about calculating variance and how businesses use it.</p> <div class="lh-callout"> <h4>TL;DR: Variance in business explained</h4> <ul> <li><strong>What is variance?</strong> A statistical measure that shows how far actual results deviate from expected or budgeted figures.</li> <li><strong>Why is it important?</strong> It helps businesses track performance, spot budgeting issues, and make more accurate forecasts.</li> <li><strong>How to calculate it:</strong> Subtract the expected value from the actual value, square the differences, average them, and interpret the result.</li> <li><strong>What are the ways businesses use it?</strong> To analyze budgets, profits, expenses, and operational efficiency for smarter decision-making.</li> </ul> </div> <a id="What_is_variance" data-hs-anchor="true"></a> <h2>What is variance?</h2> <p>Variance is a statistical measure that determines the variability or dispersion in a data set. It calculates the distance a random data point is from the mean of the data set.</p> <p>While it may sound similar, but variance<span> of a sample is not the same as the standard deviation of a sample. Standard deviation is the square root of the variance.<br></span></p> <p>In business, variance refers to the difference between what you budgeted (planned) for something and what actually happened. It's essentially a measure of how closely reality aligns with your expectations.</p> <p>A variance can be favorable (positive) if your outcome is better than expected (e.g., lower costs than budgeted). Conversely, it's unfavorable (negative) if the actual results fall short of the budget (e.g., higher expenses).</p> <p>When you plot it on a chart, many values will cluster in a particular area. Other data points and variances will be far from the median value (outliers). Analyzing variances allows leaders to make more insightful decisions for the company.</p> <a id="variance_important_for_business" data-hs-anchor="true"></a> <h2>Why is variance important for business?</h2> <p>Variance can be good news or bad, depending on the situation, aka <strong>favorable variance</strong> or <strong>unfavorable variance</strong>. A little variance in either direction is normal, whereas a large variance is newsworthy.</p> <p><a href="https://beebole.com/blog/budget-to-actuals-variance-analysis" rel="noopener" target="_blank">Through variance analysis</a>, businesses can pinpoint inaccuracies in their budgeting processes. This scrutiny helps refine your planning methods, resulting in more precise and achievable budgets. This, in turn, facilitates better financial forecasting, offering a clearer trajectory of the company's financial standing.</p> <p>If you are trending poorly in your budget but positively in your profits, this balances out to an overall positive result. So that’s cool and all. In any case, your variances impact everything from salaries to advertising and should factor into your routine financial planning.</p> <p>Measuring variance is a super useful way to refine your operation. It’s great to know which areas demand more attention or a different strategy. And the more you track and follow this information, the better. The biggest and best companies in the world recognize that there are lessons to be learn from variance. You can never be done evolving or refining your practices and processes.</p> <div class="lh-callout"> <h4>How businesses use variance:</h4> <ul> <li>Track spending vs. budget to identify areas of consistent overspending.</li> <li>Uncover reasons behind variances, like price changes or inefficient processes.</li> <li>Refine future budgets by identifying unrealistic forecasts or cost estimates.</li> <li>Use historical variances to create more accurate and realistic future budgets.</li> <li>Analyze sales variances to pinpoint underperforming products, regions, or customers.</li> <li>Identify inefficiencies in production by analyzing variances in labor hours or materials used.</li> </ul> </div> <a id="how_to_calculate_variance" data-hs-anchor="true"></a> <h2>How to calculate variance</h2> <p>Many <a href="https://www.g2.com/articles/statistical-analysis-methods" rel="noopener" target="_blank">statistical analysis methods</a>, accounting software tools, and Excel offer variance calculators and similar tools, but it’s still beneficial for your company’s financial professionals to know the basics of calculating variance, i.e., the central terms and numbers involved, and understand what these findings indicate for the future.</p> <p>Variances in profit, spending, and other business aspects yield valuable data for the company. If you’ve ever tried to predict a number, but the actual number was different from your guess, you’ve created a variance. Your guess wasn’t right, but you may now have valuable feedback for the future.</p> <p>The basic formula for calculating variance involves some second-grade math, but knowing how to correctly apply the formula and respond to the results separates the front of the class from the class clowns.</p> <div class="lh-callout"> <h4>Formula for how to calculate variance</h4> <p>V = A - B</p> <p> </p> <p>V → variance amount</p> <p>A → actual number</p> <p>B → budgeted/projected number</p> <p> </p> <p>V ÷ B x 100 = Z (Percent Variance)*<br><br><em>*Can be positive or negative<br></em></p> </div> <h3>Example steps to calculate variance</h3> <p>Let's consider the sale of a book.</p> <p>Your data set is the sales record of over a 6-month period: 78, 82, 95, 57, 49, 77  </p> <h4>Step 1: Determine the sample mean of your data</h4> <p><em>Mean = (78+82+95+57+49+77) ÷ 6 = 73</em></p> <h4>Step 2: Find the difference of each value from the mean</h4> <p><em>78 – 73 = 5 | 82 – 73 = 9 | 95 – 73 = 22 | 57 – 73 = -16 | 49 – 73 = -24 | 77 – 73 = 4</em></p> <h4>Step 3:  Square each difference</h4> <p><em>5 ^ 2 = 25 | 9 ^ 2=81 | 22 ^ 2=484 | 16 ^ 2=256 | 24 ^ 2=576 | 4 ^ 2=16</em></p> <h4>Step 4: Calculate the sum of all the squared deviations</h4> <p><em>25+81+484+256+576+16=1438</em></p> <h4>Step 5: Divide this sum of squares by n – 1 (sample) or N (population variance)</h4> <p><em>VAR = 1438÷ (6-1) = 1438÷ 5 = 287.6</em></p> <p>Before applying the formula, your accounting team should log its budgets, planned costs, goals, etc. Accuracy and thoroughness are key. Then, at regular intervals (e.g., weekly, monthly, or quarterly), they will calculate the total spending, losses, profits, and other corresponding results.</p> <p>Once you have a before-and-after picture of an individual metric and your overall financial health, you can plug these numbers into the variance equation.</p> <p>Make sure you connect the appropriate figures for each desired variance. Your expenditures should be tied to your budget, and your profits should be tied to your projections/estimates. The variances in each should spur different, but equally important, responses from management.</p> <a id="use_cases_of_variance_in_business" data-hs-anchor="true"></a> <h2>What are some common use cases of variance in business?</h2> <p style="font-weight: normal;"><span style="font-size: inherit; background-color: transparent;">There is no concrete answer as to what constitutes a reasonable variance versus a “sound-the-alarms!” variance. If you’re just getting off the ground, or your company just experienced a major pivot, spike, or plunge — whatever the reason may be — you can expect a wider-than-average margin. </span></p> <p style="font-weight: normal;"><span style="font-size: inherit; background-color: transparent;">But, in general, a number close to 1 percent or 0 means the ship is running how it should, particularly as you master the estimating process over time.</span></p> <h3>1. Profit variance</h3> <p>For starters, let’s look at <strong>profit variances</strong>. This is the deviation between your estimated profit and your actual profit in a given period of time.</p> <p><span style="font-weight: bold;">Example:</span> You planned to gross $10,000 in January, but you grossed $8,000. When plugged into the variance formula, this gives you a variance of -20 percent. A negative profit variance implies one of two things:</p> <ol> <li>Your projections were too high.</li> <li>Your company was not as effective as it needed to be.</li> </ol> <p>Success-minded management teams are liable to spin the story toward No. 2, to keep employees striving for greatness. In reality, both No. 1 and No. 2 are often true in cases of negative variance. The best decision-makers will view a negative result from all angles and make sensible adjustments when mapping out the next fiscal year.</p> <h3>2. Budget variance</h3> <p>Confusingly, a “negative budget variance” is actually a good thing. A positive budget variance, meanwhile, means you went over budget, aka, y’all spent too much. (It can be a bit confusing.</p> <p><strong>Recap: Positive profit variance = good. Positive budget variance = bad.</strong>)</p> <p><strong>Budget variance</strong> is the difference between your scheduled budget — for a department, a single project or event, or the company as a whole — and what you wind up shelling out.</p> <p><span style="font-weight: bold;">Example: </span>You have a budget of $1,000 for supplies, but you spend $1,200. When plugged into the formula, this is a 20 percent variance. It’s <em>also</em> a positive variance. You went 20 percent over budget. (Shame on you!) This is important so you can reconsider your budget from every angle.</p> <p>A positive budget variance implies one of two things:</p> <p>1. You need to spend less or find cheaper alternatives for certain costs.</p> <p>2. Your company has not allocated enough.</p> <p>Again, there may be arguments for both sides of this coin in nearly every scenario. That is up to your management team to decide (perhaps with the help of local <a href="https://www.g2.com/categories/accounting-firms" target="_blank" rel="noopener">accounting firms</a>). But some action will need to be taken so you don’t continue to spend over budget and lose money willy-nilly.</p> <p>How much are you spending on your inventory? Learn how to calculate the cost of goods sold and how it should influence your budgeting decisions.</p> <h3>3. Expense variance</h3> <p><strong>Expense variance</strong> is another angle to view budget and costs, whether for inventory, staffing, repairs, or another item from your laundry list. Also called <strong>expenditure variance</strong>, this term describes the difference between a budgeted or planned expense and the final amount.</p> <p>Example: You estimate it will cost $500 to ramp up a new employee but only $400. This equals a negative expense variance of $100, or -20 percent. Negative expense variance, like negative budget variance, is actually a positive.</p> <p>A given expense costs less than you thought it would. You can take that information into account for future expenses. But don’t blow that $100 you saved just for the heck of it. Have some restraint, people.</p> <p>We’ve covered a few key concepts of variance and they applications to business. If you’ve got Variance Fever, though, you can roll the concept over to just about any quantifiable aspect of your operation. This can include employee efficiency, headcount, and labor hours, equipment usage, website traffic, and much more.</p> <p>Tools that support variance tracking and financial forecasting can significantly ease these tasks. Platforms for budgeting, accounting, or performance analytics help teams act on variance data quickly.</p> <p>Not sure where to start? Check out verified user reviews on G2 for the<a href="https://www.g2.com/categories/budgeting-and-forecasting" rel="noopener" target="_blank"> best budgeting and financial forecasting software</a> tailored to your company’s size, industry, and goals.</p> <a id="faq" data-hs-anchor="true"></a> <h2>Frequently asked questions on variance (FAQs)</h2> <h3>1. How to calculate a variance?</h3> <p>To calculate variance, you measure how far each data point in a dataset is from the mean (average). Follow these steps: find the mean of your dataset, subtract the mean from each data point to get the deviation, square each deviation, and then find the average of all squared deviations. The result is the variance — a measure of how spread out your data is.</p> <h3>2. What is the formula to find variance?</h3> <p>The formula for variance depends on whether you're dealing with a population or a sample:</p> <p><strong>Population variance (σ²):</strong> σ² = Σ(xᵢ - μ)² / N<br><strong>Sample variance (s²):</strong> s² = Σ(xᵢ - x̄)² / (n - 1)</p> <p>Where: xᵢ = each data point, μ = population mean, x̄ = sample mean, N = total number of data points in the population, and n = total number of data points in the sample.</p> <h3>3. How to find the variance easily?</h3> <p>An easy way to calculate variance is to use a calculator, spreadsheet software like Excel, or a statistical tool. For quick manual calculation: compute the mean, subtract the mean from each data point and square the result, add up all squared differences, and divide by the number of data points (or n - 1 for a sample). This process eliminates complex steps and reduces calculation errors.</p> <h3>4. What is the relation between variance and standard deviation?</h3> <p>Variance and standard deviation are closely related — both measure data dispersion. The standard deviation is simply the square root of the variance: σ = √σ². While variance expresses spread in squared units, standard deviation converts it back to the original units, making it easier to interpret. A larger variance (and thus a larger standard deviation) indicates greater variability in the dataset.</p> <h4>Know your numbers</h4> <p>Developing a firm grasp of your organization’s numbers is a smart play, regardless of industry or size. As you move along, you can dig deeper by measuring specific performance metrics, operational costs, etc.</p> <p>You can use variance as a barometer for countless decisions. From Day One, you should closely observe, track, and organize your budget, costs, profits, and losses. It may sound simple, but its importance cannot be overstated.</p> <p><span style="font-weight: bold;">Learn more about <a href="https://www.g2.com/articles/descriptive-statistics" rel="noopener" target="_blank">descriptive statistics</a> and build a strong foundation for understanding and using various financial concepts.</span></p> <p style="font-weight: normal;"><em>This article was originally published in 2019. It has been updated with new information.</em></p> <script type="application/ld+json" id="faq-schema"> { "@context": "https://schema.org", "@type": "FAQPage", "mainEntity": [ { "@type": "Question", "name": "How to calculate a variance?", "acceptedAnswer": { "@type": "Answer", "text": "To calculate variance, you measure how far each data point in a dataset is from the mean (average). Follow these steps: find the mean of your dataset, subtract the mean from each data point to get the deviation, square each deviation, and then find the average of all squared deviations. The result is the variance — a measure of how spread out your data is." } }, { "@type": "Question", "name": "What is the formula to find variance?", "acceptedAnswer": { "@type": "Answer", "text": "The formula for variance depends on whether you're dealing with a population or a sample: Population variance (σ²): σ² = Σ(xᵢ - μ)² / N. Sample variance (s²): s² = Σ(xᵢ - x̄)² / (n - 1). Where: xᵢ = each data point, μ = population mean, x̄ = sample mean, N = total number of data points in the population, and n = total number of data points in the sample." } }, { "@type": "Question", "name": "How to find the variance easily?", "acceptedAnswer": { "@type": "Answer", "text": "An easy way to calculate variance is to use a calculator, spreadsheet software like Excel, or a statistical tool. For quick manual calculation: compute the mean, subtract the mean from each data point and square the result, add up all squared differences, and divide by the number of data points (or n - 1 for a sample). 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Soundarya Jayaraman

Soundarya Jayaraman is a Senior SEO Content Specialist at G2, bringing 4 years of B2B SaaS expertise to help buyers make informed software decisions. Specializing in AI technologies and enterprise software solutions, her work includes hands-on testing of tools, comprehensive product reviews, competitive analyses, and industry trends that empower buyers to choose solutions with confidence. Outside of work, you'll find her painting or reading.

How to Calculate Variance: Formula, Steps, and Use Cases

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