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The Importance of Accurate Variance Reporting for the New Year

At a Glance

Main Takeaway

Variance reports are used by businesses and organizations to monitor their financial performance and identify areas where they are over or underperforming. Accurate variance reporting is essential for companies in order to make adjustments to improve the bottom line.

Next Step

Learn more about the importance of accurate variance reporting and how Windes Client Accounting Services can implement variance reporting software to improve your business’s financials in 2023.


What is a Variance Report?

A variance report is an analysis that compares two sets of values: actual financial performance to budgeted or expected performance. Businesses use variance reports to identify revenue, expenses, and profitability performance gaps. Variance reports are also used to 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 costs for production 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

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 important 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

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

Overhead spending variance is a miscellaneous category for elements that do not fall under your other subcategories. This 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

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

To create a variance report, you gather and analyze financial data from your business or organization. This can include financial performance data, such as revenue, expenses, and profitability, as well as budgeted or forecasted data.

You will then need to calculate the variance for each metric by subtracting the budget or forecast from the actual results. For example, if budgeted revenue was $100,000 and actual revenue was $90,000, the variance would be negative $10,000.

Your accounting team will use the variance data to create a report that compares actual results to the budget or forecast. Include a summary of the variances and detailed information on each financial metric.

To simplify variance reporting, consider partnering with a Client Accounting Services firm like Windes that implements the specialized financial planning and analysis (FP&A) software Jirav.

Variance reporting is of high interest this time of year. Jirav has the solution; the Windes Client Accounting Services Team knows how to use Jirav and put it to work for you.

The platform is designed to help organizations create budgets, forecasts, and financial reports. It uses cloud-based software to create reports for revenue and expense forecasting, budgeting, and variance analysis.


Improve Your Budget Variance With Windes

Whether your existing variance reports show major gaps in financial performance or you want to create variance reports from the ground up, Windes can help. Our Client Accounting Services can implement Jirav to automate your business’s variance analysis, allowing you to focus on taking the necessary steps to improve your budget variances.

Contact our team today to learn more about our client accounting services and how Jirav can help you increase your organization’s cash flow and improve your bottom line.


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