1 What is variance analysis?

Variance analysis is the process of calculating and explaining the differences between actual and budgeted figures for a given period. There are two types of variances: favorable and unfavorable. A favorable variance occurs when the actual result is better than the budgeted result, such as higher revenue or lower cost. An unfavorable variance occurs when the actual result is worse than the budgeted result, such as lower revenue or higher cost. Variance analysis can be applied to any financial or non-financial metric, such as sales, expenses, production, quality, or customer satisfaction.

2 Why is variance analysis important?

Variance analysis is important because it helps you monitor and control your business performance, and make informed decisions based on the actual data. By comparing the actual and budgeted results, you can identify the areas that are over or underperforming, and investigate the reasons behind the variances. You can also evaluate the accuracy and reliability of your budgeting and forecasting process, and adjust your plans and strategies accordingly. Variance analysis can also help you communicate your results and achievements to your stakeholders, and provide feedback and guidance to your team.

3 How to perform variance analysis?

To perform variance analysis, you need to have a budget that reflects your goals and assumptions, as well as a reliable system to collect and report the actual data. Additionally, you should define the level and frequency of analysis, and the key performance indicators (KPIs) that you want to measure. The process of variance analysis involves calculating the variances for each KPI by subtracting the actual result from the budgeted result, categorizing them as favorable or unfavorable, analyzing the variances by identifying contributing factors, reporting the variances in a concise format, and taking action based on the findings. Taking these steps can help you make informed decisions and improve your performance.

4 How to use variance analysis software and tools?

Performing variance analysis manually with spreadsheets or accounting software can be tedious, prone to errors, and limited in scope and functionality. To do it more efficiently and effectively, specialized software and tools can automate the data collection and calculation, as well as provide advanced features. These features include integrating data from multiple sources and systems, creating and updating budgets and forecasts, generating variance reports with interactive visual elements, applying different types of variance analysis such as static or rolling, performing root cause analysis and sensitivity analysis, collaborating on the variance analysis results with stakeholders, and providing feedback. Examples of such software and tools are Adaptive Insights, Prophix, Planful, Vena, and CCH Tagetik.

5 How to improve your variance analysis skills?

Variance analysis is an essential skill for any corporate finance professional, as it helps you evaluate and improve your business performance, and support your decision-making and planning processes. To become proficient in variance analysis, you can take online courses, read books or blogs such as Coursera, Udemy, Investopedia or CFI. You can also practice your skills by applying them to real or simulated data sets with different software and tools such as Excel, Power BI or Tableau. Additionally, seek feedback from your peers, managers or mentors to learn from their experiences and best practices. Finally, stay up to date with the latest trends in variance analysis and adapt your skills to the changing business environment and needs.

6 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?