Table of Contents
A variance occurs when expenses such as revenue or labour are either more or less than what the company anticipated and budgeted for. Hospitality businesses such as hotels and restaurants can experience variances due to occupancy rates, check sizes, supply costs or labour costs being different than expected. Variances are analyzed to determine exactly how much these differences have impacted revenue and profits.
Variances may be favourable (F) or unfavourable (U) in terms of their effect on the profitability of the business.
Variances
If your restaurant anticipates serving 5,000 meals with an average check size of $20, your anticipated revenue would be $100,000. If you end up serving only 3,500 meals, but the average check size is $25, your revenue would be $87, 500. The difference between your expected revenue and your actual revenue is called the variance. In this case, there would be a negative revenue variance of $12,500. If you end up having higher-than-anticipated revenues, you would have a positive revenue variance.
Analysis
Variance analysis allows the owner or manager to determine what caused the variance. For example, if a hotel expected labour costs to total $50,000 but ended up paying $55,000, a variance analysis would be conducted to determine what happened. If the hotel’s estimate was based on renting 10,000 rooms and paying the cleaning staff $10 an hour to clean them, with an estimated cleaning time of half an hour, differences in any of these factors could have caused the variance. If the analysis determines that the hotel rented as many rooms as anticipated and paid the same hourly rate as anticipated, the variance can only have occurred because the rooms took longer than half an hour to clean.
Significance
Variance analysis makes it possible for owners and managers in the hospitality industry to make the correct strategic decisions needed to overcome problems before they cut into profits too much. If you don’t conduct a variance analysis when a significant variance occurs, you have nothing other than guesswork to guide you. You cannot know whether to address the variance by charging higher rates, finding a more affordable supplier, controlling labour costs or improving occupancy rates unless you do a variance analysis to find out exactly what happened and why.