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How to Calculate Variance for Business Owners

Variance is a common term in statistics, but it might be unusual for businesses. Learn why variance is important for business and how you can calculate it.

Learning how to calculate variances will enhance your business acumen, help you secure funding, and allow you to analyze key performance metrics accurately. Businesses use variance statistics in both their internal business operations and to showcase achievements and challenges to potential investors.

You might include variances (positive and negative) in a pitch deck to educate potential investors. This transparent approach can establish trust among your business partners. However, variances do more than that for businesses of all sizes.

Calculating variances provides valuable insight into every aspect of your business, from budgeting expenses accurately to product growth strategy. Tools like ads, email campaigns, and landing pages all drive traffic to your products and services. Yet, how well do you understand what's working and what's not?

Measuring your success rate starts with knowing what to track—sales, profitability, and adherence to budget, to name a few examples. However, you first must master the art of variance tracking, which is similar across all these essential metrics. Are you wondering how to measure email marketing success after you've set a conversion goal? This article will prepare you for that and more.

Black text over yellow background that reads, “Variance: Variance is a statistical measurement that identifies how far off each data point is from the mean or average of the data set.”

What is variance?

In statistics, variance measures how much data points vary from one another. It accounts for outliers (very high or low data points) and calculates the average value. It's important to note that variance is not the same as the standard deviation of a data set.

Variance is a statistical measure of how far each data point is from your average. It can help you determine market stability if you are an investor. This important tool has many uses for small businesses seeking to run their operations more efficiently and improve their forecasting.

When you plot out variances on a chart, many values will cluster in a particular area. Other data points and variances will show up far away from the median value (outliers). Analyzing variances allows leaders to make more insightful decisions for the company.

Why is variance important for business?

Variances can help businesses run their companies more efficiently. They allow you to plan ahead and make careful decisions about all aspects of your organization. If you want to better control a project’s expenses, monitor actual time and cost against your project plan. Additionally, variance analysis will help your leadership team spot issues, trends, threats, and opportunities in the near and far future.

Here are some key factors to keep in mind as you learn more about how to calculate variances for businesses:

  • Variances tell you the spread of data points from the mean.
  • It measures the dispersion of the entire data set.
  • Investors pay attention to variance to determine the profitability of your company.
  • Variances compare each asset against the whole data set.
  • Standard deviation is the square root of the variance.

So, are you ready to put variance calculations to work for you?

Illustration of a magnifying glass over a graph with text that reads, “Variance can help your business: Run operations more efficiently; Make informed decisions; Correct course and plan ahead."

Uses of variance in business

Use variance to determine how effectively you're managing your business expenses. Variances also have an important role in the budgeting process and can tell you where to focus your attention when it comes to increasing profitability.

Take a look at the following examples of how you can use variance in specific aspects of your business. These will help you brainstorm how to apply variances to your startup or established business.

Business expenses

From office supplies and other variable expenses to fixed costs such as utilities, your expenses affect your ultimate profitability. By budgeting for expenses, you can ensure you have enough money to cover your costs.

Variance analysis can also help you focus on areas where you can save money or improve your return on investment. For example, you may notice that you're spending more money on fixing your printers than it would cost to outsource the entire operation.

In this case, you can make an effective business decision that will fatten the bottom line and save your internal team time and energy.

Budget

Accurate budgets can make or break businesses. In order to budget accurately, you need to know how close your last forecast came to the actual cost or revenue stream.

Here is a simplified example:

Budget variance % = Actual amount divided by the budgeted amount. (Multiply by 100 to get a percentage.)

So, if the budgeted amount is $15,000 and the actual amount is $20,000, you would divide ($20,000 minus $15,000) by $15,000: $5,000/$15,000 is 25% (over budget).

Profits

Major causes of profit variance include:

  • Variance in sales price
  • Changes in the cost of goods sold
  • Changes in the volume sold

Gross profit analysis gives you valuable insight into variances that are increasing or decreasing your bottom line. By analyzing how your data varies from your target or mean, you can improve your operations, invest in tools that will help you streamline processes, and, ideally, positively impact your company’s performance as a whole.

Investments

Variance is used to evaluate risks. Savvy investors will want to understand your variances and how you plan to improve your performance before giving you money for your startup. You can also use variances to evaluate the effectiveness of your startup marketing strategy.

For example, let's say your return on investment for three years equals 10%, 20%, and -15%, respectively. This leads to a 5% return on investment. For each year, that's a difference of 5%, 15%, and −20%.

A savvy investor will note the downward trend of performance as well as the low ROI and likely pass on this opportunity.

Black text on yellow background that reads, “Variance Formula: σ2=N∑i=1n​(xi​−x)2​”

How to calculate variance

As established earlier, it’s important to know how variance is calculated. Here is a simplified version of the variance formula:

s^2= [Y [X - x^2] divided by (n - 1)

where,

s^2 = sample variance Y = sum of… Χ = each value x = sample mean n = number of values in the sample

When you measure variance, you're calculating the mean or average of your data points. By squaring the differences and dividing the squares by the total number of data points, you can get a good idea of how well (or not) you are meeting measured goals.

Here’s how you calculate business variances:

  1. Determine the mean of your data.
  2. Find the difference of each value from the mean.
  3. Square each difference.
  4. Calculate the squared values.
  5. Divide this sum of squares by n – 1 (sample) or N (population).

For the easiest route, find an online variance calculator or Excel workbook set up to do the heavy calculating for you.

Example of calculating variance

Usually, companies use software to calculate business variances. However, it can be useful to do so manually until you fully understand the process. This example will use six numbers representing the sale of a particular product.

Sales over a six-month period: 41, 46, 69, 60, 52, 32 (This is your data set.)

Step 1: What’s the mean (average)?

Add the sales number and divide by six (number of data points).

Mean = (41 + 46 + 69 + 60 + 52 + 32) ÷ 6 = 50

Step 2: What’s the deviation for each sales number?

Remember, 50 is the mean. So, subtract 50 from each sales number.

41 – 50 = -9 46 – 50 = -4 69 – 50 = 19 60 – 50 = 10 52 – 50 = 2 32 – 50 = -18

Step 3: Square each deviation

Multiply each deviation from the mean to get all positive numbers:

(-9)2 = -9 × -9 = 81 (-4)2 = -4 × -4 = 16 192 = 19 × 19 = 361 102 = 10 × 10 = 100 22 = 2 × 2 = 4 (-18) 2 = -18 × -18 = 324

Step 4: What is the sum of squares?

Add up the squared deviations to get the sum of the squares.

81 + 16 + 361 + 100 + 4 + 324 = 886

Step 5: Divide by n – 1 or N

In this case (a sample), we’ll divide this result by n – 1, where n is the number of data points (6).

886 ÷ (6-1) = 886 ÷ 5 = 177.2

The next step is brainstorming ways to achieve more consistently positive results to move your sales efforts forward.

Launching a business? Use the all-in-one platform for startups

Learning how to calculate variances for business starts with a full understanding of each step. It’s also important to understand the role variances play in running your company. By focusing on critical variances, you can identify bottlenecks and wasteful spending and streamline cumbersome processes.

Whether you’re launching a business or want to expand your existing footprint, Mailchimp can help you grow. Our marketing platform has many tools to simplify data tracking for variance analysis and other purposes.

Supporting many types of entrepreneurship, Mailchimp tools are an ecommerce time saver. So, from measuring the accuracy of your forecast to making reasonable changes to your business plan, we have you covered.

Get started today to see how Mailchimp can help you set up and automate variance tracking for your budget, profitability, and investments.

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