In budget management, what is the disadvantage of an adverse variance?

An adverse variance occurs when actual results are worse than what was budgeted or planned. This situation directly impacts financial performance because it indicates that costs have exceeded expectations or revenues have fallen short. Consequently, an adverse variance can lead to reduced profitability, increased financial strain, and potentially negative implications for cash flow and investment capacity.

While an adverse variance can highlight areas where a business needs to reassess its operations or strategic direction, the primary concern remains its detrimental effect on overall financial health. The other options either suggest benefits or positive indicators that are not aligned with the concept of an adverse variance, which fundamentally signifies a negative deviation from the financial plan.