Variance analysis is a financial tool used to assess the difference between planned financial outcomes and actual results. It helps organizations understand why certain budgeted figures, such as revenues or expenses, differ from what was actually achieved. By identifying these variances, businesses can make informed decisions to improve future performance. This analysis typically involves comparing budgeted amounts to actual amounts and categorizing the variances as favorable or unfavorable. Favorable variances indicate better-than-expected performance, while unfavorable variances highlight areas needing attention. Overall, variance analysis is essential for effective financial management and strategic planning.