How can you identify the root causes of variances in financial performance?

To identify the root cause of variances in financial performance, it is important to identify what are the drivers of the outcome. For example, the operational drivers for sales performance are price, sales volume, discounts issued, price mix etc. Then it is important to recognize the trend analysis of these drivers and what internal & external factors that are affecting them. It could be economic factors, operational efficiencies, technological changes, regulatory impediments etc. Also, it is important to benchmark findings/results against similar firms in the industry.

Financial performance is ultimately a product of operational drivers - so for example sales financial performance will be based on prices, discounts and sales volumes for different product categories. By defining a "driver based plan" and recording actuals on the same basis you have the "drivers" of your financial performance to hand. You can then use systems to analyse the root causes of variances by identifying outliers at the operational driver level - not at the financial level. Thus, you can trace the origins of variances to plans and forecasts down to the operational activity level. You can then apply actions at the operational level to get back on track.

Comparando mensalmente as varia??es do que foi or?ado por cada área/CC/tipo de servi?o x executado. Analisar as varia??es e buscar as devidas justificativas com as áreas e seus planos de a??o para mitigar os estouros.

Relatórios financeiros sempre s?o os mais indicados para verificar e analisar as varia??es tanto quanto para superávit, quanto déficit.

Identifying the root causes of variances in financial performance requires a systematic approach. By collecting and analyzing financial data, identifying relevant KPIs, conducting root cause analysis, using cause-and-effect diagrams, conducting root cause interviews, and developing action plans, organizations can uncover the underlying factors contributing to variances and take proactive measures to address them. Continuous monitoring and evaluation are key to maintaining and improving financial performance over time.

To identify and resolve any problem, you first have to collect data and analyse them to determine trends and patterns over a period of time. Same applies here.

Go beyond financials: Don't solely rely on financial statements. Gather operational data, customer feedback, internal reports, and external market data to paint a holistic picture. Tools: Data warehouses, Business Intelligence dashboards, Industry reports Example: Analyze website traffic logs alongside sales data to understand reasons for lower conversion rates.

To identify the root causes of variances in financial performance, start by reviewing financial statements and comparing actual results to budgeted figures. Analyze trends over time and consider external factors like changes in the market or regulations. Engage with stakeholders to gather insights, and use financial ratios to pinpoint areas of concern. Keep the analysis simple and prioritize actionable recommendations to address identified issues, monitoring progress regularly to ensure improvements in financial performance over time.

3. Analyze data Analyzing financial data is essential for identifying the root causes of variances in financial performance. It involves examining the details of the financial statements, comparing actual performance against budgets or forecasts, and conducting variance analysis to understand the factors contributing to the discrepancies.

To identify the variance and root cause for that is possible by comparing the financials and including P account, balance sheet, dimension, wise revenue or any other related reports. Each item must have a note attached to it and if needed the GL history needs to be drill down to see what exactly is the cause of variance in the financial reports. The percentage change in the minimum value must be introduced to identify the variance to avoid the minimum change and only focus on the areas which affect the business . this will also also helps and careful planning for the upcoming months and for forecasting and budgeting.

Embrace diverse techniques: Don't stick to one method. Use trend analysis, variance decomposition, correlations, and regression analysis to identify patterns and relationships. Tools: Statistical software, Data visualization tools Example: Compare sales trends across different product lines and market segments to pinpoint specific areas of underperformance.

Don't jump to conclusions: Don't assume the first explanation is the right one. Conduct in-depth interviews with key stakeholders, observe processes, and test hypotheses to confirm root causes. Tools: Internal surveys, Process flowcharts, Root Cause Analysis (RCA) techniques Example: Interview sales representatives to understand their perspective on competitor discounts and their impact on customer behavior.

Focus on actionable solutions: Don't simply diagnose the problem. Propose specific, measurable, achievable, relevant, and time-bound (SMART) actions to address the root causes. Tools: Project management tools, Action plans with clear ownership and timelines Example: Recommend targeted marketing campaigns to counter competitor discounts and improve customer value perception.

Like other things in life power laws also apply to variance analysis. There are usually one or two underlying narratives which explain what has happened (IS) and where we are (BS). If you are able to understand the narrative and connect the dots to BS and IS line items then we can understand 80% of the variances. But here's the catch: to really make these connections, to truly understand the story, you need more than just a surface level grasp. You need deep understanding of how each transaction is recorded in the ledger. This is where first principles come into play, reminding us to start at the beginning. Understanding the basic entries isn't just a technical skill; it's the foundation that allows us to see the bigger picture.

Any competent accountant can do the variance analysis. The really important thing is to understand the business/operation, without that you won’t be able to interpret the variance analysis properly.

Useful methodology!!! To simplify one needs to understand the budgetary model. It includes the process details, components and assumptions. In the simplest form we are looking at the input, process, output and comparing actual to budget in terms of volume and price. The variance analysis helps one focus on the mix and determining the root cause. Historically we looked at reporting these at month end and as part of quarterly reviews and full year forecast activities. In this day and age we should be employing AI to provide 24/7 type of interactive corrective models, measures and analysis. We have the ability and scope to make a difference in real time against set criteria of performance….

Remember: This is a dynamic process, not a linear one. Iterate and refine your approach as you gather more information and insights. By combining diverse tools, real-world experience, and a data-driven approach, you can effectively identify and address the root causes of financial performance variances, paving the way for sustainable business growth.

Talk to people involved in the operations. You can do the analysis and come up with pretty graphs but making it a meaningful exercise involves communication. Talk to the people who run things about why there are variances. Maybe a project slipped, maybe a bill arrived late, maybe there was a misunderstanding about accruing costs and you've double counted. You will get the answers by talking, and listening.