How can you master variance analysis?

2 Calculate the variances

The second step is to calculate the variances, which are the differences between your budget and actual data. You can use different methods to calculate the variances, depending on the type and level of detail you want to achieve. For example, you can use a simple formula to calculate the total variance, or you can use more complex methods to calculate the price, volume, mix, or efficiency variances. You can also use percentages or ratios to express the variances as a proportion of your budget or actual data.

3 Analyze the causes of variances

The third step is to analyze the causes of variances, which are the factors or events that explain why your budget and actual data differ. You need to identify and categorize the causes of variances, based on their nature and impact. For example, you can use a variance tree to break down the variances into smaller components, or you can use a fishbone diagram to map out the possible causes and effects of variances. You can also use a SWOT analysis to assess the strengths, weaknesses, opportunities, and threats of your performance.

4 Report and communicate the variances

The fourth step is to report and communicate the variances, which are the outputs of your variance analysis. You need to present and explain the variances in a clear, concise, and relevant way, using charts, tables, graphs, or dashboards. You also need to tailor your report and communication to your audience and purpose, such as managers, stakeholders, or investors. You should highlight the key findings, insights, and recommendations of your analysis, as well as the assumptions and limitations of your data and methods.

5 Take corrective actions

The fifth step is to take corrective actions, which are the responses to your variance analysis. You need to implement and monitor the actions that will help you reduce or eliminate the negative variances, or enhance or sustain the positive variances. You also need to evaluate and measure the effectiveness and efficiency of your actions, using feedback, benchmarks, or KPIs. You should align your actions with your strategic goals and objectives, as well as your budget and forecast revisions.

6 Review and improve your process

The sixth and final step is to review and improve your process, which is the continuous improvement of your variance analysis. You need to reflect and learn from your process, identifying the strengths and weaknesses of your data, methods, and actions. You also need to seek and incorporate the feedback and suggestions of your team, colleagues, or experts, to improve your skills and knowledge. You should update and refine your process, based on the best practices and standards of your industry and organization.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?