What are the best variance analysis methods for financial services?

1 Static variance analysis

This method compares the actual results with the original budget or plan, without adjusting for any changes in volume, price, or mix. It is useful for evaluating the overall performance of a financial service and identifying the main sources of variance. However, it does not account for the impact of external factors or the interrelationships between different variables. For example, a static variance analysis may show that a bank's net interest income is lower than budgeted, but it does not explain whether it is due to lower interest rates, lower loan demand, higher deposit costs, or a combination of these factors.

2 Flexible variance analysis

This method adjusts the original budget or plan for the actual level of activity or output, such as the number of transactions, customers, or products. It is useful for measuring the efficiency and productivity of a financial service and isolating the effect of volume changes on performance. However, it does not account for the impact of price or mix changes. For example, a flexible variance analysis may show that an insurance company's claims expense is higher than budgeted, but it does not explain whether it is due to higher claim frequency, higher claim severity, or a different mix of policies.

3 Sales mix and sales quantity variance analysis

This method breaks down the sales variance into two components: the sales mix variance and the sales quantity variance. The sales mix variance measures the effect of selling a different proportion of products or services than planned, while the sales quantity variance measures the effect of selling a different amount of products or services than planned. It is useful for analyzing the profitability and market share of a financial service and identifying the optimal product or service mix. However, it does not account for the impact of cost changes. For example, a sales mix and sales quantity variance analysis may show that a mutual fund's revenue is higher than budgeted, but it does not explain whether it is due to lower expense ratio, higher management fees, or a different mix of funds.

4 Price and cost variance analysis

This method breaks down the revenue and expense variance into two components: the price variance and the cost variance. The price variance measures the effect of charging or paying a different price than planned, while the cost variance measures the effect of incurring a different cost than planned. It is useful for assessing the pricing and cost control strategies of a financial service and identifying the opportunities for improving margins. However, it does not account for the impact of volume or mix changes. For example, a price and cost variance analysis may show that a brokerage firm's profit is lower than budgeted, but it does not explain whether it is due to lower trading volume, lower commission rates, or higher operating costs.

5 Comprehensive variance analysis

This method combines the previous methods and analyzes the performance of a financial service from multiple perspectives. It considers the impact of volume, price, mix, and cost changes on revenue, expense, and profit. It is useful for providing a holistic and detailed view of the financial service's performance and identifying the root causes and interdependencies of variances. However, it requires more data, time, and resources to conduct and interpret. For example, a comprehensive variance analysis may show that a credit card company's profit is higher than budgeted, and explain how it is influenced by higher card usage, higher interest rates, lower default rates, lower reward costs, and lower operating costs.

6 Here’s what else to consider

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