Variance Analysis is a method of evaluating the difference between projected resources and actual numbers. The quantitative approach helps to maintain better control over the business. When using variance analysis, one best practice is to review variances on a trend line so that any dramatic shifts can be rapidly determined. Once the variation is suspected is determined, you find anything that is suspect; variance analysis can help you to investigate the reason behind the big difference in what’s planned and what happened financially.
Variance analysis is a method that helps businesses to have better control over their financials. It’s a quantitative method, and it’s best used when reviewing variances on a trend line so that any dramatic shifts can be rapidly determined. Upon suspecting a variation, variance analysis helps you examine and understand the difference between what’s planned and what financially occurred. For example, if you are using variance analysis to keep track of your company’s spending, you might find that you are spending more money than is budgeted for. If this happens consistently, it may be time to re-evaluate your budget or set new benchmarks for what’s expected.
There are several reasons your business might be experiencing financial variances. For example, you might find that your business is over or under-performing. If this happens consistently, it may be time to reevaluate your budget or set new benchmarks for what’s expected.
When there ought to be a considerable shift in the variance trend line, one becomes conscious of the dysfunction and resolves it. But where would one begin, and how would one pinpoint what’s causing the variance? In such circumstances, automation can help to assess data points and highlight issues. The reasons for variances in a business can be many, and the best way to identify them is by using automation to assist in the data analysis. For example, you might find that there are more deals being made or deals being lost than expected. In this case, you would look at the deals that were made and compare them to the deals that should have been made.
The variance analysis to focus on depends upon the type of the business. The reason for variances is also dependent on certain factors, like:
- Market conditions.
- Budgeting standards.
- Difficulty benchmarking.
- Material variances.
- Overhead variances.
- Labor variances.
Since variance analysis must be performed constantly and promptly, many organizations fail to reap its benefits.
Benefits of Variance Analysis:
- Planning: Helps managers to budget more brilliant and more accurately.
- Control: Assists in more effective control management of departments and budgeting.
- Responsibility: Helps with the assignment of trust within an organization.
- Monitoring: Helps to monitor success and failure.
Sets Expectations: Encourages forward-thinking and helps to set benchmarks.
Munshi Atik Chartered Accountants (formerly Enterprise House Chartered Accountants) can help you understand, calculate, and record the variance from your expected numbers and dig deeper to find the causes for these variances. We can then work together to develop plans for what needs to be done to correct variances.