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How do you measure and evaluate the impact and value of your variance analysis?

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Variance analysis is a key tool for corporate financial planning and analysis (FP&A) professionals to compare actual results with budgeted or forecasted expectations, identify the drivers of deviations, and recommend corrective actions or strategic adjustments. However, not all variance analysis are created equal, and you need to measure and evaluate the impact and value of your variance analysis to ensure that it is relevant, accurate, and insightful. In this article, we will discuss how you can do that by following these six steps:

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?? Bruno Oliveira, MBA FMVA?

CFO ???? at Swissport | Strategy | FP&A | Leading Finance Transformation | Lean Finance | Operational Excellance |…

1 Define your objectives

Before you start your variance analysis, you need to define your objectives clearly. What are the key performance indicators (KPIs) that you want to measure and monitor? How do they align with your business goals and priorities? How will you communicate and present your findings to your stakeholders? By defining your objectives, you can focus your analysis on the most important and meaningful aspects of your financial performance.

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2 Choose your variance types

There are different types of variances that you can use to compare your actual results with your budgeted or forecasted expectations, such as absolute, percentage, favorable, unfavorable, price, volume, mix, efficiency, and so on. Depending on your objectives, you need to choose the appropriate variance types that will help you answer the questions that you have about your financial performance. For example, if you want to understand how your sales revenue changed from one period to another, you might use a mix variance to analyze the impact of changes in product or customer mix.

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?? Bruno Oliveira, MBA FMVA?

CFO ???? at Swissport | Strategy | FP&A | Leading Finance Transformation | Lean Finance | Operational Excellance | International Speaker | C-Level
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A varia??es podem ser de muitos tipos, porém sempre s?o comparativas. Além dos critérios de variancia, também é importante colocar dimens?es de análise. Por exemplo, ao analisar receita, entenda: clientes, produtos, linha de produto, regi?o, filial, linha de negócio, e quaisquer outras dimens?es do seu negócio. Com custos e despesas, entenda da mesma forma que os fatores principais, construa "bridges" entre realizado e compara??o para evidenciar em grupos as varia??es.

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3 Analyze your variance drivers

Once you have calculated your variances, you need to analyze the underlying drivers that caused them. This will help you understand the root causes of the deviations, the factors that influenced them, and the implications for your business. For example, if you have a favorable price variance, you might want to investigate whether it was due to higher demand, lower competition, improved quality, or other reasons. Similarly, if you have an unfavorable volume variance, you might want to examine whether it was due to lower customer satisfaction, higher attrition, market shifts, or other factors.

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Nathan Hastings

Principal, Spicewood Advisors
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Any impactful non-financial drivers that can be reasonably quantified in your forecast model should be incorporated. I suggest that you notate the forecast method (or for economic drivers, data source and/or query parameters) for each new driver, at least in short, qualitative form, for the sake of inter-period consistency. I have always held the opinion that financial results should be forecasted indirectly wherever possible, and understanding non-financial drivers is critical to understanding what actions are necessary. Going deeper, ascertaining realistic statistical deviations from the average (or primary prediction) for each, corresponding to best/worst/target/etc. cases can enable generation of those scenarios in short order.

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4 Evaluate your variance significance

Not all variances are equally significant or relevant for your business. Some variances might be small, temporary, or expected, while others might be large, persistent, or unexpected. You need to evaluate the significance of your variances by considering their magnitude, frequency, trend, and impact on your KPIs and business goals. For example, if you have a small unfavorable variance in one month, but a positive trend over the year, you might not need to worry too much about it. However, if you have a large unfavorable variance that persists over several months, and affects your profitability or cash flow, you might need to take action.

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5 Recommend your variance actions

Based on your variance analysis, you need to recommend actions that will help you improve your financial performance, address the issues or challenges that you identified, and leverage the opportunities or strengths that you discovered. Your recommendations should be specific, measurable, achievable, realistic, and timely (SMART), and aligned with your objectives and business goals. For example, if you have a favorable price variance, you might want to increase your prices further, expand your market share, or invest in product development. If you have an unfavorable volume variance, you might want to improve your customer service, retention, or acquisition strategies.

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6 Monitor and review your variance outcomes

Finally, you need to monitor and review the outcomes of your variance analysis and actions. You need to track the progress and results of your actions, measure the impact and value of your variance analysis, and assess whether you achieved your objectives and business goals. You also need to review your variance analysis process and methods, and identify any areas for improvement or enhancement. For example, you might want to refine your data sources, assumptions, or calculations, or use different tools or techniques to conduct your variance analysis.

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Nathan Hastings

Principal, Spicewood Advisors
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If not in place already, implement a process whereby both forecasted accounting datasets, resulting metrics, and unit economics are recorded in a systematic fashion and archived each period. If you’re not currently forecasting down to the GL-level, at minimum, ensure that original budget lines are represented as forecast lines or vice versa. Retention of this data will enable graphical representation or analysis of either specific or aggregated budget departures as a function of time.

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Bryan Vehonsky

FP&A | Financial Modelling | Budgeting & Forecasting
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Variance analysis doesn’t really matter if you aren’t going to interrogate why you were wrong (and you will always be a little wrong). Understand which variables you can directly impact and which you can’t. If there are major misses happening on the controllable variables then there is something breaking down with process or in the data you are using. If you can’t pull apart your forecast and point to the specific drivers you got right or wrong then you need to rebuild.

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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?

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Bryan Vehonsky

FP&A | Financial Modelling | Budgeting & Forecasting
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Just a final thought, if you want your FP&A teams to feel valued, actually act on the underlying causes of variances. Maybe this is unrealistic expectations upstream in the forecast process, or discovering real issues that need to be solved. Finance can provide valuable insights if you let them.

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How do you measure and evaluate the impact and value of your variance analysis?

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1 Define your objectives

2 Choose your variance types

3 Analyze your variance drivers

4 Evaluate your variance significance

5 Recommend your variance actions

6 Monitor and review your variance outcomes

7 Here’s what else to consider

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