Variance reporting is an often-underutilized accounting tool, but can provide useful insight into running a successful business. As a business owner, a variance report can help you compare how you are currently doing with a past performance or against your planned budget. It is a productive way to correct any actions or continue the course based on how the numbers are looking. Identifying variances enables to you make changes quickly, minimizing possible adverse effects to your business or striking while the iron is hot to maximize an opportunity that may have a narrow window.
Variance Reporting with Prior Periods
A great use of variance reporting is to compare current period results to prior period results. For example, you can generate an income statement with the following six columns:
| 1. Current month activity Example: February 1 to February 31, 2023 | 2. Prior year month activity Example: February 1 to February 31, 2022 | 3. Month difference or variance Equation: (Column 1 – Column 2) | 4. Year-to-date activity Example: January 1 to February 31, 2023 | 5. Prior-year-to-date activity Example: January 1 to February 31, 2022 | 6. Year-to-date difference or variance Equation: (Column 4 – Column 5) |
The variances allow you to see, at a glance, whether your sales or expenses have increased in the same month compared to last year and evaluate YTD current year to YTD prior year variances. Identifying monthly variances is especially important if your business experiences seasonal fluctuations. Variance reporting is a way to take monetary surprises away and focus on facts to make informed decisions.
Let’s Take Variance Reporting One Step Further: Account Analysis.
Account analysis is the next level of variance analysis where you are identifying a variance and analyzing it at the account level to determine the cause. This level of understanding supports good decision making as you are getting to the root cause of the positive or negative variance identified. At LCW CPAs we recommend recording the reason for identified variances so it is clear and documented for future reference. Setting up a strong financial dashboard is critical. An example of the dashboard is an Excel spreadsheet that is color-coded (e.g., green – the variance is positive; red – the variance is negative) to easily identify variances and what needs attention.
Variance Reporting to Plan or Budget
Variance reporting can also compare current period results to your plan or budget. Below is an example of how you can generate income statements with these six columns:
| 1. Current month activity Example: February 1 to February 31, 2023 | 2. Current month budget Example: February 1 to February 31, 2022 | 3. Month difference or variance Equation: (Column 2 – Column 1) | 4. Year-to-date activity Example: January 1 to February 31, 2023 | 5. Year-to-date budget Example: January 1 to February 31, 2022 | 6. Year-to-date difference or variance Equation: (Column 5 – Column 4) |
Questions You May Have After Account Level Variance Analysis:
How did your budget details differ from what actually happened?
If your current variance is positive, is there an opportunity to do more?
If your current variance is negative, how can you get back on track? Are there actions you can take to minimize the negative impact?
Performing a timely variance analysis helps you find opportunities to exploit the positive as well as make decisions to change course when negative.
Variance reporting can be set up to be as simple or complex as needed to provide useful information to manage your business. Our professional team at LCW CPAs is well-versed in variance reporting and would enjoy talking to you about your business in the near future. If you have any questions about setting up reports, establishing a budget, or how best to analyze your business in more depth, please contact us. We take great pride in getting to know our clients and their businesses including helping you have the information you need to make informed decisions.