Each year, you spend weeks with your team building up your budget for the following year. Hours of discussions filled with critical decisions led you to a great plan. But the plan is only half the job—what’s missing now is the execution.
The execution comes from real life. It’s what happens when your best plans meet against the reality of the markets. If you choose the correct KPIs, you can easily see how you’re doing.
How do the actual figures look? How do you measure up against your budget?
Of course, for a business to be successful, you need a great product and enough customers to buy it. However, aside from those critical operational aspects, transparently measuring and reporting variances is one of the keys to running a successful business. Indeed, it’s not the variances themselves that are valuable—they’re only numbers in a table or charts on a dashboard.
The real value of solid variance reporting is the actions taken as a result of knowing how your business is doing. Regularly comparing against your baseline can provide a pretty accurate indication. Good variance reporting can keep managers accountable for their areas of responsibility and highlight areas where improvement is necessary.
Tables and spreadsheets are a great first step for variance reporting. Charts and graphs allow you to visualize what’s going on in the business, but a dashboard-style visual approach can make variance reporting more accessible to managers at multiple levels in the company—not just for the financially inclined.
What is a Variance Report?
A variance report is an analysis that compares two sets of values: actual financial performance and budgeted or expected performance. Businesses use variance reports to identify revenue, expenses, and profitability performance gaps. They also highlight significant differences or variances between real-time results and a projected budget.
Variance reporting is essential for businesses because it helps direct focus on the areas needing the most attention. It serves as an early warning system when one area, such as labor costs, is not aligning with a company’s projections, allowing accounting departments to address the issues and improve cash flow.
Understanding Variance Report Results
When using variance reports for your business, it is helpful to set up reports to identify positive and negative variances. This structure streamlines the interpretation process, letting your financial team quickly identify the most critical areas.
Your team’s focus should be on variances with the most significant magnitude, not necessarily the largest percentage variance. For instance, your team runs a variance report that shows a 70% negative variance ($400) in a small category like insurance and a 15% variance ($20,000) in a more significant category like the cost of goods sold. In this case, the second variance should be the immediate focus.
Positive Variances
Positive variances are typically favorable and indicate where the company is performing well. These variances include financials such as general improvements due to a high-earning period, lower production costs due to higher efficiency, and increased revenue due to extra sales.
Negative Variances
Negative variances are areas where the company is not performing as projected and can indicate internal or external issues causing unfavorable results. These variances include poor sales numbers, increased material costs, or high labor costs due to production inefficiencies.
Common Variance Types
A well-designed variance report sub-categorizes a business’s profits and losses (P&L) to highlight specific performance areas. By breaking up the P&L lines into a few major subcategories, you can quickly see how a critical area aligns with your goals.
You can include the following variances in your financial report:
Usage variance refers to the differences in the materials your company uses versus expected usage amounts. In variance reporting, usage variance is typically calculated for materials, labor, or overhead costs. It is an essential metric for businesses because it can indicate whether a company is using its resources as efficiently as possible. Factors that might influence usage variance include:
- Budget considerations versus higher scrap rates
- Machine inefficiencies that negatively affect your output
- Changes to operations that create positive usage variances due to using less material
Price variance refers to your baseline material prices versus variances. Price variance is an essential calculation for businesses because it shows whether a company is paying more or less than it had budgeted or planned for a particular resource. These variances are influenced by multiple factors, such as:
- Raw material price changes vs. the standard price or what your company budgeted for
- Lower materials costs due to discounts for purchasing a higher volume
- Price differences due to alternative suppliers or materials due to supply chain issues or tariffs
Overhead spending variance is a miscellaneous category for elements that do not fall under your other subcategories and can include factors such as:
- Overhead expense variances such as higher electricity or supply usage that do not align with your budget
- Unplanned equipment repair costs
- Extra fees or charges, such as freight costs not included in the original budget
Labor variance reflects the differences in the cost of labor when compared to your company’s benchmarks or industry standards. The amount of labor used and changes in labor rates can affect this variance, including instances such as:
- Positive variance created by higher efficiency (increased output for the same labor hours)
- Wages paid are higher or lower than your standard baseline
- Employee hours are higher or lower than your benchmark
How to Create a Variance Report
Properly designed variance reporting also helps to highlight challenging areas and segments that are really excelling. Obviously, as important as having a visually compelling report is, you need reliable data behind it. To help you drive the business forward, variance reports need to be meaningful and representative of your actual situation.
The following are five key elements to creating meaningful variance reports that will make your dashboards really stand out:
- Efficient data flow
- A meaningful baseline
- Real-time reporting
- Actionable insights
- The ability to create custom reports
Mastering these five aspects of variance reporting will help you drive actions and decisions in your business. Who needs to do what, and by when to achieve the goals you’ve all agreed to work toward?
Surely, you’ve heard the phrase, “Garbage in, garbage out.” Applicable to many facets of health and business, it’s especially true in financial reporting. Your tables and dashboards, even the decisions you make as a business, are only as good as the information underneath them.
While bad or incorrect information can lead to weak or even wrong decisions, clean data efficiently compiled through transparent data flows can keep your variance reporting lean.
Variance reporting that needs to be heavily analyzed with layers of cumbersome calculations presents a challenge. Complexity can drive inefficiencies or errors in your dashboards, leading to slow decisions.
That’s where Windes can help. Our financial dashboard platform can connect to multiple data sources and integrate with your existing software, pulling in accounting and other relevant data to create a complete, accurate financial picture.
With all the data in one place, you can easily explore and leverage powerful financial analytics in real-time directly within the dashboard, streamlining your financial reporting processes.
On the other side of efficient data flows from your actuals, you need a solid, meaningful baseline. Normally, the baseline refers to the annual financial budget, but it could also be a forecast or a budget “high”/budget “low.”
A meaningful baseline consists of targets that have been aligned with all members of the management team. The KPIs are coherent when broken down through the different functions and segments. For example, with an overarching goal of $100k net margin, your business needs to drive $500k in sales (KPI1) with an average of 20% net margin (KPI2). With everyone’s buy-in on the common goals, the targets are clear, and the whole team knows what they are working towards.
Comparing against a disputed baseline throws up major roadblocks to efficient decision-making. Discussion drifts from the actual situation to whether the target is actually the target. A clear baseline eliminates discussion about the goals and lets you drive improvements.
While some figures make more sense to analyze on a monthly level, i.e., personnel and real estate expenses, many can be analyzed in real time. Revenue, margin, and other marketing KPIs can be reported continuously and reviewed instantaneously.
Variance reports, updated in real-time, allow them to perform a scoreboard-like function. You can see how the business is progressing daily or weekly. Variance reports can be used to analyze marketing campaigns and test the efficiency of implemented changes. Real-time dashboards permit all team members to keep a finger on the pulse of the organization and how you’re progressing toward the goal.
One critical aspect of measuring and reporting variances is to remember that the reports are only as good as the actions they drive. The sole purpose of your reporting is to drive meaningful action. This gives you a chance to look at the scoreboard and see quickly what’s working well and what needs to change.
To keep your team focused, it’s best to keep your variance reporting clean and avoid having too many targets. Ideally, pick several key KPIs per audience and keep them at the forefront. Of course, each team should, in turn, have its own reports, highlighting the aspects of the business over which it has control.
Driver-based modeling is also useful for getting actionable insights from your data. Use variance reporting and projections to show the impact of specific missed targets. Allow these scenarios to drive action and focus on specific things each team can work on to right the ship.
Variance reporting is nuanced and needs to be customizable — both for the business overall and for each individual team. Each business needs customized variance reporting because each business has its own specific opportunities and challenges.
Cater your variance reports to your audience’s specific needs and allow your teams to adapt their reports as well. Board members and investors need a different level of granularity than individual team members. Choose key, high-level KPIs for executive-level reporting and give teams the ability to drill down for specific needs and segments.
Letting each team see how the business is performing as a whole and focus on their key metrics keeps them involved and shows them how their performance affects the business.
Keys to Meaningful Variance Reporting
Good variance reporting can help everyone on the team stay up to date on how the business is performing. It allows you to regularly see how you’re doing compared to the organization’s goals and make necessary adjustments.
While these dashboards will not solve any problems on their own, they will help you highlight problem areas and drive actions to improve underperforming aspects of the business.
Variance reporting can also serve as a forum for praising teams and individuals who are doing well and achieving their goals. Teams also benefit from a better understanding of what actions are working best.
Custom, real-time reporting of key KPIs can help you ensure you’re focusing attention where it’s needed the most.
By partnering with Windes Advisory Services, you will have access to skilled accounting professionals who utilize specialized financial planning and analysis (FP&A) tools designed to help your organization create budgets, forecasts, and financial reports. Our experts will produce easy-to-understand visual reports so you can see your company’s revenue and perform expense forecasting and variance analysis.
Our FP&A Services provide a historical review of past performance, plus additional analysis and insights into the present and foresight for what’s next. See below for additional details on the data, analysis, and insights we can assist with.
Windes Advanced FP&A services include:
- Financial Reports: Income Statement, Balance Sheet, Statement of Cash Flows
- Profit and Loss % of Total Income
- Revenue and Expense Graphs
- Windes Expert Analysis and Insights
- Period Comparison
- Interactive Online Dashboard
- Reports Package (see above)
- Data Visualizations
- Exports .xls available
- Real-Time Updates
- Financials & Actual Data
- Two Primary Dashboards: Financial Reporting & Analytics, Budget + Forecast
- Customizations (varies)
- Accounting Integrations – such as QuickBooks Online, Netsuite, and Excel
Powerful Variance Reports for Data-Driven Decisions
Bid farewell to uncertainty in your variance reporting by leveraging advanced analytics for real-time FP&A insights with Windes.
At Windes, we’re dedicated to equipping our business clients with the tools and insights needed to drive profitability and foster growth. Working with our team of accounting and financial experts, together, we will empower your business with actionable insights and strategic guidance. With our FP&A services, you’ll get a more comprehensive understanding of your company’s operations, enabling you to make informed decisions, optimize performance, mitigate risks, and strategically plan for long-term success.
Trust Windes FP&A to guide your business toward sustainable growth and financial stability.
Contact us today to discover how Windes can transform your variance reporting and more.