Insightful variance analysis for internal use—what should growing companies think about?
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Preparing variance analysis is one of the most important financial closing activities for growing companies. For it to be meaningful, it should help growing companies:
Understand whether targets are being attained and, if not, the root causes behind them and any necessary corrective actions; and
Identify drivers and outliers.
Some growing companies conduct variance analysis only between actual financials and KPIs against budget and target, whereas some analyze both actuals against budget or target and historical performance. The choice depends on the need for information and the company's stage of maturity. The granularity of the variance analysis also depends on who the end user of the information is.
Data collection and robust understanding of the business are two key factors in harnessing insights that help the finance function craft insightful variance analysis. There is some subjectivity involved in how much data to gather, as each company's situation is different. Things can also change as the company's business grows, or when data that was previously hard to collect becomes readily available due to technological improvements. Consequently, the usefulness of variance analysis may shift over time, so finance leaders must always watch out for new developments.
To illustrate, let's use the sales account as a standalone example in identifying data points for collection to help craft variance analysis.
Let's say that a trading company regularly sells three types of products in an unregulated environment and has the following data:
Current month and year-to-date actual sales
Current month and year-to-date budgeted sales
Actual sales for comparative periods last year
Previous months' and year-to-date actual sales
The company is in its second year of commercial operations. All sales are denominated in the company's functional currency.
Keeping the two goals in mind, here are additional data points to consider collecting for the relevant periods in connection with the preparation of variance analysis. Each company's situation is different, so the additional data points I'm about to share might not be representative of all circumstances, but should be useful as general guidance:
Sales contribution and units sold by customer, product, and channel, including discounts granted
Average selling price by product and any changes to the selling price
External factors driving customer spending or price changes—such as macroeconomic indicators and regulatory developments
Marketing effort highlights
Customer spend outlook
Need assistance in crafting variance analysis? Contact VMC.
VMC's views are general insights—not one-size-fits-all advice. Every company's situation is unique.
