How can you identify the root causes of variances in corporate FP&A?

Apart from the above types of variance, we should also be looking for 1. Variances arising from Product mix. 2. Variances arising due to efficiencies.

In the world of finance, we often see differences in what we expect and what actually happens, especially in terms of sales numbers or costs. Imagine a company hoping to sell 1000 of their new product but only finding 800 customers -that's a volume variance-. Or picture them budgeting 10 USD for each unit's materials, but they end up spending 12 USD instead – that's a price variance-. Getting a grip on these ups and downs is super important for companies to keep their finances on track and make smart yet informed decisions.

Root cause analysis can easily be done by asking the right set of questions. With Humanli.Ai's Data on Demand now you simply attach your databases or Excel and ask. You don't need to create a pivot or as many filters or keep on retrieving information from n number of places. By asking the right questions will fetch you the answers and that too in seconds. You can do scenario analysis, whatif analysis or sentiment analysis, just ask data on demand do it for you.

In many companies the root causes are not identified at first sigth. There is technology that measure micro-deviations and correlate events making the link to the point in the process where occures. At large scale this can be done only through advance technology. Fast implementation, reduced cost and quick ROI are the common results. Please contact me if you are interested. Best Regards to the audience!

Correctly identifying variance types is key in corporate FP&A to pinpoint underlying issues. Distinguishing between volume and price variances allows a more precise analysis. If sales revenue is below projection, segmenting the variance helps determine whether the issue is with the quantity sold (volume variance) or the price achieved per unit (price variance). This separation aids in targeting specific areas of the business for improvement. For instance, a volume variance might lead to examining sales strategies or market demand, while a price variance could prompt a review of pricing policies or competitive positioning. Accurate categorization is essential for effective problem-solving and strategic decision-making.

In FP&A, using variance formulas to calculate differences between actual and budgeted figures is important. For example, if we budgeted 100K USD in sales but achieved 120K USD, the sales volume variance is 20K USD positive. Visualising these with charts (like a waterfall chart) can show how each variance (like sales, costs) contributes to overall profit or loss. This simple visual approach helps identify areas needing attention, guiding strategic decisions and performance improvements in a dynamic environment.

Utilizing variance formulas and charts is an effective way to delve into financial discrepancies. These tools break down variances into understandable components, allowing for a precise analysis of each element affecting financial outcomes. Waterfall charts, for instance, are particularly useful in displaying how each variance component cumulatively impacts overall profit or loss, compared to budgeted figures. This method offers clarity in understanding the specific contributors to variances, be it sales volume, pricing strategies, or cost management. By quantifying and visually representing these variances, you gain deeper insights into financial performance, enabling targeted strategies to address and rectify the underlying causes.

Es relevante; contar con un cuadro de mando que muestre visualmente de manera efectiva las variaciones e indicadores claves y relevantes. Para ello; el uso de herramientas de análisis que puedan graficar son eficientes en tiempo y forma.

To analyse the impact of Variances one needs to first calculate them. This can be done by using mathematical formulae. These formulae are generally standard but you can modify them as per nature of business. For eg: Salary Cost Variance = Std Salary - Actual Salary Labour Rate Variance= (Std rate - Actual Rate) Labour Efficiency variance = (Actual Hrs- Std Hrs) * Std Rate Using visual charts can be helpful for understanding & presenting the reasons. For eg: an EBITDA Bridge Chart made using MS PPT can explain How FY 23 EBITDA of say 10% increased to FY 24 EBITDA of 14% By showing red steps that fall down to indicate components that reduced EBITDA & showing green steps that rise up to show components that helped increase the EBITDA.

Investigative analysis is crucial for pinpointing the exact reasons behind financial variances. It involves delving deeper beyond the numbers, examining operational, market, and strategic influences. For instance, a negative sales volume variance might stem from shifting market trends, competitive pressures, or internal operational inefficiencies. Gathering data, seeking feedback, and scrutinizing market reports provide comprehensive insights. This thorough examination not only reveals the core issues but also guides towards strategic solutions. Effective variance analysis, therefore, is a blend of quantitative assessment and qualitative understanding, essential for steering a startup towards its financial and operational objectives.

To get to the heart of financial ups and downs, start by lining up your real numbers against your planned ones, and zero in on the big differences. Think about why these gaps exist; is it about how much you're selling, or the prices? Look at what's happening inside your company and in the wider world, like changes in the market or how well your operations are running. Chat with different teams to get their take. Dive into the data with some smart tools to really understand what's going on. Keep coming back to your forecasts, tweaking them with what you've learned. This way, you're not just making guesses, but smart, well-informed choices that keep your finances on track.

Just analysing mathematically is not enough. You need to go a step forward to derive root causes of Variances. For example - An Increase in Salary Cost could be generally due to Increase in Headcount But there could be more reasons that do not appear easily such as - Change in CTC structure of employees due to Increments / Promotions/ Retention bonuses There could be no change in Headcount at all and still cost could increase due to Exits being at Lower cost & Entries at higher cost. An Increase in PAT may generally be due to Increase in Revenue but it could also be due to an one timer income like unexpected gains or favorable book entries. Talking with people who directly work in that area can be very helpful in such an analysis.

El análisis financiero, tiene por objetivo ser una herramienta de TOMA DE DECISIONES para la empresa, por tanto, debe ser información útil y que contenga la información necesaria para tal objetivo; y desde ahí evaluar las acciones a realizar, sin son de origen interno o prepararse para enfrentar al mercado. Contar con analistas expertos o consultores de apoyo que acorten los tiempos de investigación

Other factors that need to be considered while doing variance analysis could be - Change in market conditions - Macro economical factors like change in interest rates, foreign exchange rates - Seasons that benefit or do not benefit the business (eg Rainy season will help in selling more umbrellas but in winters sale would be minimal) - Unexpected events (eg Covid helped Pharma industry, Lockdown helped online sellers) - One timers (eg Winning of a lawsuit, Getting insurance claim) - Change in attitude of people (a lot of people nowadays want work from home which leads to low rent cost to organisations)

1- Conocer bien el negocio y sus variables. 2- Tener definidos los indicadores claves. 3- Tener definida la metodología y las herramientas a utilizar. 4- Contar con equipo adecuado. 5- Mantener comunicación efectiva en la organización.