What financial management practice helps organizations understand the difference between expected and actual performance?

Variance analysis is a critical financial management practice that allows organizations to compare expected outcomes to actual results. This process involves measuring the difference, or variance, between budgeted figures and the actual financial performance of the organization. By analyzing these variances, it becomes possible to identify areas of improvement or concern, understand the factors contributing to performance discrepancies, and make informed decisions to address any issues or adjust strategies.

This method is particularly useful for managers as it provides insights into the effectiveness of budgeting processes and operational execution. It helps organizations stay on track financially and strategically by highlighting where performance is deviating from plans, thereby enabling corrective actions to be implemented promptly.

In contrast, cost-benefit analysis focuses on evaluating the financial implications of specific projects or decisions rather than directly comparing expected and actual performance. Cash management concerns overseeing organizational cash flow to ensure liquidity and is not focused on performance metrics. Budget preparation involves setting financial targets and plans for the future but does not inherently assess performance against those plans.