What Makes Favorable or Unfavorable Revenue?

Budget Reporting

When your accounting department produces reports, they'll often show you how actual results differ from your initial planning budget. These differences are called variances. You can see variances in many areas of your budget, such as expenses, salaries, supplies and revenue, among others. A variance can be favorable or unfavorable. The budget report doesn't always tell why a variance occurred. That's the job of upper management to determine why projections were off and what needs to be done, if anything, to correct them.

A favorable revenue variance happens when your business realizes more revenue than expected, especially in light of the actual amount of activity, or sales, that occurred. As an example, take a landscaping business owner who needs to make a planning budget to determine how much labor she needs to hire, as well as how much supply she needs. She has steady accounts in a community with 500 homes and only one competitor. Last year, she provided services for 250 homes. Given the rough economic times plus more aggression by her competitors, she estimates, she'll do 200 homes in the coming year and keeps her price steady at $75 per home, which have roughly similarly sized lawns. She buys her supplies on those projections, but at the end of the year, she has actually landscaped 275 homes. Because her expected revenue was $15,000 and actual revenue was $20,625, she had favorable revenue.

An unfavorable revenue variance is usually negative. It happens when your business takes in fewer revenue dollars than expected. One example could be found in the case of a health-care facility that projects surgical revenue of $50,000 by performing, for example, 200 procedures of a certain kind. However, in dealing with insurance companies and late payers, the company is forced to negotiate and accept less money on several of those accounts. The facility takes in only $35,000 and thus has an unfavorable revenue variance of $15,000.

Favorable revenue does not mean profit, nor does unfavorable revenue automatically mean loss. Favorable and unfavorable revenue are simply two factors in determining the financial health of your organization. For example, in the case landscaping business that realized a gain in revenue would also experience an increase in labor and supply costs thanks to those extra accounts she got. Likewise, the health-care facility could spend less money on maintenance of equipment that could partially offset the unfavorable revenue.