We all know that the best laid plans … rarely go to plan. Especially in corporate finance. Budget variance analysis (also referred to as BvA, or budget vs actual analysis) is one of the core FP&A reporting tasks. BvA analysis helps you account for those changes to the plan and connect insight to action when it’s time to analyze performance.
Strategic finance teams know that reporting and analyzing budget variances is one of the best ways to improve predictions and support the business with concrete suggestions to pivot or respond.
We’re diving into all things BvA, including the what, why, and how the right technology can save time on variance analysis and maximize value for your business.
What is a Budget Variance Analysis?
A budget variance is the difference between your plan and your actual results. Variances can be either favorable or unfavorable. This depends on whether performance exceeded expectations and benefited the business, or fell short and hurt the business.
Find the variance for each line item and budget category with this basic formula:
Variance = Actual Value - Budgeted Value
Each individual variance can be a positive or negative value, depending on the metric being measured.
The analysis comes next. Budget variance analysis is the process where analysts and finance managers dig deeper to pinpoint possible reasons behind each variance, especially when the variance exceeds the threshold your business is comfortable with.
Finance teams do BvA analysis on a regular basis, either monthly, quarterly or annually.
Why is BvA Analysis important?
Budget variance analysis highlights what’s working and what isn’t in granular detail, which leads to more strategic decisions informed by your findings.
The analysis process helps your FP&A team go deeper to understand the operational drivers that affect business performance and the bottom line – a necessary component of strategic FP&A. These operational drivers could include overhead expenses, employee turnover rates, cycle time to produce a product, or customer acquisition cost.
Variance analysis can be more or less granular depending on your size. Smaller organizations can stick with high-level comparisons of overall variance. But larger businesses will need to take a deep dive into performance by different departments or product lines. The ‘guardrails’ of the budget are extremely important for start ups or smaller businesses, so variance analysis helps all teams to stay on track.
How to perform Budget Variance Analysis
- Collect Your Data
Effective budget variance analysis depends on good data. Without an FP&A tool, you’ll need to aggregate and compare the budgeted values and the actuals in a new spreadsheet. And you’ll need to hunt down the data from lots of different sources.
With FP&A software, you can quickly generate the BvA report, since the relevant data is accessible through integrations with ERP, HRIS, and CRM systems.
- Calculate the Variances
Follow the formula above by comparing datasets in spreadsheets. Or, take advantage of your FP&A tool to quickly calculate variances and highlight any areas of concern.
Don’t forget to evaluate variances on a line-item level, rather than grouping multiple expenses together. A significant variance on one item could be missed when you average and compare the variance of a group.
- Perform Your Analysis
Generally, there are three main reasons for a budget variance:
- Errors in your budget (like missing data or formula errors)
- Changes in the economy or market environments
- Over or underperformance in the business
Use the opportunity to ask, “What factors led to this variance?” “Are they inside or outside our ability to influence?” or, “What led us to make such confident predictions in the budget?”
The more you understand operational drivers for your business, the more accurate and useful your recommendations will be to your business partners.
It’s also important to set variance thresholds for your business. Larger enterprises can be comfortable with variances that are immediate red flags for a smaller business. Set your thresholds so you can focus your analysis on the outlying variances that will reveal more strategic insights.
- Report Your Findings
The next step is to report findings back to business partners. These reports display the budgeted and actual figures and highlight significant favorable or unfavorable variances. They also include commentary on possible reasons behind the discrepancies and strategic recommendations on how to respond moving forward.
The reporting process is time consuming for FP&A teams who are completing step 1 and 2 manually. Stakeholders rely on these reports to stay informed and understand the fiscal and operational health of the business, so it should be your goal to get reports out swiftly and spend more time on analysis than on the manual components.
- Adjust the Forecast
After completing the BvA analysis, apply your findings and adjust your forecasts based on the trends you identified and any decisions from the executive team on a change of strategy or priorities.
Automate for faster BvA analysis
BvA analysis is your regular opportunity to be a strategic partner to your business. Are you making the most of it?
A budget vs actual report offers valuable insights to business partners. But the process of preparing a report can take so long that the information is delivered late and is no longer very useful. And without sufficient time to dig into analysis, recommendations and commentary on the reports is often sparse.
A modern FP&A tool automates BvA analysis and report sharing, which saves time and allows your team to spend more time on higher value strategic analysis.
Using Stratify for Budget vs. Actual analysis
With a 3rd generation FP&A tool like Stratify, you’ll gain significant time to spend on analysis and investigate operational trends and drivers. These activities are far more valuable to the business than reconciling data and hunting down spreadsheet errors.
Stratify highly simplifies the process of creating and sharing readable budget variance reports, and makes it easy to get feedback from business partners.
- Stratify integrates and automatically syncs key business data so the annual plan and forecasts are built on accurate and current data.
- Finance managers don’t need to spend valuable time creating reports each month. Automated reports are customizable and are easy for non-finance users to interpret.
- Stakeholders can view critical reports sooner, so they can make data-informed decisions.
- All users can comment within Stratify to ask quick questions and align with business partners.
With a clear understanding of the strategic value of budget variance analysis, it’s time to streamline your process so you can spot trends and make valuable recommendations to stakeholders.
Want to experience a better, faster BvA analysis process? See the benefits of reporting with Stratify. Get in touch for a customized demo.
Subscribe to the Strategic Finance Brief that persists