While there are hundreds of accounting reports that can help you gain better insight into the financial health of your business, one of the most popular – but also most underutilized – is the variance report. A variance report helps you compare your actual performance with a past or expected performance. It makes crystal clear how far you’re straying from where you want to be and can therefore make it easier to course-correct earlier.
Variance to Prior Periods
A standard variance report that almost anyone can generate compares current period results to prior period results. For example, you can generate an income statement with six columns:
- Current month activity, such as March 1 to March 31, 2022
- The same period of the prior year, such as March 1 to March 31, 2021
- The variance between both months (column A minus column B)
- Year-to-date activity, such as January 1 to March 31, 2022
- Prior-year-to-date activity, such as January 1 to March 31, 2021
- Year-to-date difference or variance (column D minus column E)
The variance allows you to see, at a glance, whether your sales or expenses have increased compared to last year. Seeing monthly variances is especially important if the business experiences seasonal fluctuations.
You can take your reporting one step further to explain the variances in an accounting process called account analysis. Take a look at the components of each number to see what caused the variance. Then, record your explanation in a notes section of your variance report.
You may not want to spend management time on the minor variances. To avoid this, a good financial dashboard, or simply an Excel spreadsheet, can help you color-code the balances that are more than 10 percent (or any percent you feel is material) off track.
Variance to Plan or Budget
You can also develop a variance report that compares current period results to the revenue and profit plan. Here, you would generate an income statement with these six columns:
- Current month actual activity, such as March 1 to March 31, 2022
- Revenue/Expense plan for the same period above
- Month difference or variance or (over)/under (B minus A)
- Year-to-date actual activity, such as January 1 to March 31, 2022
- Year-to-date revenue/expense plan, such as January 1 to March 31, 2021
- Year-to-date difference or variance or (over)/under (E minus D)
Do the same thing above, color-coding and explaining the variances using account analysis. How did your plan details differ from what actually happened? If it’s better, can you do more? If it’s worse, how can you get back on track? Performing a timely variance analysis helps you find either a) available opportunities to exploit for profit, or b) ways to get back on track faster so you don’t lose as much.
Of course, with revenue/expense plan versus actual variance reports, you do have to create the the plan first! If you’re not already receiving variance reports, would like help creating a revenue/expense and profit plan, or would simply like to set up a session to better understand variances, please feel free to reach out any time.