How to Use Variance Analysis to Exceed Your Financial Goals

What is Variance Analysis?

Variance analysis is a powerful methodology for measuring financial performance. By comparing actual and forecasted results to budgeted or target results, finance can identify whether they are behind, meeting, or exceeding their financial goals.  Importantly, with the right structure in place, finance teams can identify why organizations are ahead of or behind their targets.

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Read on to understand some key strategies for ensuring your team’s results are on the right track.

Company Level Analysis

Step 1 is to understand whether the company as a whole is meeting its financial goals.  This is instructive to determine if the company is performing well in the most general sense, and is most often the number that your board of directors or, if you’re a public company, Wall Street will consider.  A simple comparison of actual to expected net income inside of any basic spreadsheet will do the trick here, no special software required.

Account Level Analysis

Step 2 is to answer the question of why you are under- or over-performing your expectations.  And for this, you need to go a step further.  Instead of simply viewing the company’s net income delta, you need to compare performance at an individual account or line item level.  This analysis will pinpoint the accounts where you are ahead of or behind where you should be.  You can do this either in your spreadsheet of choice, or you can use purpose built FP&A software to speed the exercise. You will be able to easily spot outliers when you compare each account or line item versus budget.

Once you’ve identified the accounts in question, it’s important to drill in to pick out specific customers or suppliers that are driving the account performance.  Are you over-spending on a key supplier? Are there a handful of customers that are spending more than you expected?  You can use your ERP system for this drill-down, or software like Telemetry that makes the exercise faster and more straightforward.

Segment P&L Analysis

Step 3 is to answer the question of where inside your business the differences are coming from. This is much more nuanced than the prior two approaches.  In order to accomplish this task, you need to have built and assigned segment P&Ls — i.e. micro P&Ls for every part of your business that’s useful to track — out to your different operators. Each of these segment P&Ls will have its own allocation of cost or revenue for each account, and critically, its own budget for each.

By comparing these segment P&Ls’ results to their individual budgets, you will pinpoint the teams, projects, departments, or locations that are on or off target.  That gives management the ability to double-down on the projects that drive the most value for the company, and supply help to those that need it.

Segment P&Ls can also unlock insights that might not otherwise be caught.  For instance, spending may be on target across the company for a specific account, yet one team is overspending inside that account and one team is underspending.  That will highlight corrective actions for each.  Or perhaps one team is over-spending on marketing, but more than making up for it by pulling in additional revenue, therefore that spend might be allowed to continue since it’s ROI-positive.

How to Create Segment P&Ls

As previously mentioned, creating segment P&Ls, though powerful, is far from a trivial exercise.  Setting them up and, critically, managing them over time is almost impossible to do with Microsoft Excel or Google Sheets alone.  Software built explicitly for this purpose, like Telemetry, is the fastest, easiest, and most scalable way to approach it.  Telemetry’s workflow allows finance to allocate revenue and cost accounts among whatever horizontal cut of your business you want to track.  Where precision matters even more, Telemetry allows you to allocate down to the customer, supplier, or employee level.  Those same allocations are then applied to the overall company budget, so that each segment P&L has its own set of distinct target numbers.  Best practice is then to share these segment P&Ls with the business owners of each of the initiatives, so that they have full visibility, and therefore accountability, for their own performance.

It’s only by using multiple lenses and getting into the details that you can spot irregularities, help struggling projects, and boost investment in successful ones so that you exceed your company’s overall financial goals.  Telemetry gives you these superpowers.

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