A critical component of financial planning and analysis (FP&A) is the monitoring of actual results against forecasted results. Variance reporting is one tool that financial analysts use to track actual performance against projections.
Once a budget is made and passed down by management, there needs to be mechanisms by which the organization monitors its success at implementing the framework.
Variance reports are one of the most common financial tools that are used in the corporate finance profession. Accountants regularly create variance reports as part of management reporting packages that are reviewed regularly.
What Is Variance Reporting?
Variance reports compare actual financial results to forecasted results for a specific period of time.
The report itself highlights the difference in value between projections and actual outcomes. The differences are then reviewed and scrutinized to understand what created them.
It is important to note that just because a variance is positive does not mean it is not reviewed with the same intensity as variances that have negative impacts. The concept behind variance reporting is to reveal deficiencies and possible efficiencies that exist.
Typically, variances are reported in terms of percentage and absolutes, meaning the variance is presented as both a numeric value and percentage difference. This allows accountants to identify the severity of the variance with context and substance.
Why Is Variance Reporting Important?
Variance reports are used in several ways that have a meaningful impact on the way managers make decisions.
First, the variance report can highlight materially inaccurate assumptions in a budget and forecast.
FP&A professionals often review the variance reports in conjunction with their budgets and forecasts to make ongoing adjustments to their financial models when these material inaccuracies in assumptions arise.
Second, it forces managers to address material variances from projections to understand the root causes of the deviations.
This in-depth review of the operations that drive business outcomes is healthy and forces leadership to find ways to become more efficient and cost effective. Similarly, it gives insight into what actions created positive outcomes and how they could be replicated in the future.
The interpretation of variance reports is where details materialize into actionable items. The report itself is often seen as a tool for controlling future costs and helps to communicate financial results in the broader context of the organization as a whole.
Variance reports help organizations to be proactive in making changes to their operations that have a positive impact on business outcomes.
The reports help to identify when changes are required in operations, help to highlight management concerns, and can add legitimacy to managerial sentiment.
Oftentimes, managerial experience precedes actual results, so variance reports are good at adding validity to issues raised by staff or management to senior leadership and help to enhance the communication of the enterprise.
Finally, variance reports serve to manage risk by providing insights to financial analysts and business leaders, which forces them to address both controllable operations and external factors that impact business.
As management becomes aware of variances, they are placed in a position to make meaningful changes to mitigate risks and enhance stakeholder value.
How To Perform Variance Reporting
Variance reporting can be done in many ways but always starts with a budget and forecast.
Without these items, the actual results have nothing to be compared to. Regardless of the budgeting approach taken, all budgets will result in a financial plan. This plan serves as the foundation against which actual results are compared.
There are various types of variance reports used, but the most common outside of financial variance reports are purchase price variance, labor rate variance, material yield variance, and volume variance.
Regardless of the type of variance reporting you are performing, the below steps apply.
Step 1: Organize Data
Before getting started, organize your budgeted information into columns that will allow you to easily aggregate the data you wish to compare. For financial variance reports, you can use the pro forma financial statements created as a result of the budget process.
Step 2: Insert Actual Data
In the columns next to your forecasted data sets, aggregate the actual data for the period.
For financial variance reports, this would be the actual balance sheet, income statement, and cash flows. Ensure that both columns are clearly labeled.
Step 4: Compare Actual to Budgeted
In the next column, determine the difference between your budgeted and actual data. Pay close attention to the direction of the formula.
For example, if expenses are higher in the forecasted period than the actual period, this is positive.
In the next column calculate the percentage difference. This can be done by using the basic formula (Actual Results / Forecasted Results)-1 x 100.
Step 5: Analyze the Outcomes
This is the most critical aspect of variance reporting. Take time to understand what the variance report is communicating.
All variances should be investigated and explained in the final report to management. Managers should be able to clearly understand where problems originated that led to the variance.
Be sure to pay equal attention to positive variances that occur as well. This gives management the opportunity to focus on efficiencies and other improvements that might be working better than expected.
Using Datarails to Build Your Variance Report
Every finance department knows how challenging building a variance report can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced data management tool that can help your team create and monitor budgets faster and more accurately than ever before.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.
This takes budgeting from time-consuming to rewarding.