Determined to Stay on Budget This Quarter? Use This Variance Report

What is a variance report?

A variance report is a financial analysis tool that compares actual performance against planned or budgeted performance. It identifies the differences between what a company or department expected and what it achieved within a period, such as a quarter or a fiscal year. By providing fiscal insights, variance reports can help managers make informed decisions and “right the ship” where necessary. 

Variance reports are key to strong financial management. They are great tools for identifying and then addressing common budget pitfalls, such as: 

• Operational inefficiencies
• Unexpected costs
• Inaccurate business assumptions
• Market changes

Highlighting variances between production or purchasing budgets and actuals helps businesses understand how their assumptions differ from actual outcomes. Examining where budget and actuals diverge helps analysts refine and improve the forecasting process for continuous improvement and better business outcomes.

Download the free tool: Variance Report Template

When do you need a variance report?

Variance reporting should be a consistent practice within the financial planning and analysis (FP&A) function. Here are five times when a variance report may be especially helpful:

During monthly, quarterly, or annual financial reviews: Variance reports during financial review help assess how a company adhered to the budget in the past period and identify areas of over or underspending.

After trying out new business strategies: Variance reporting offers a way to evaluate the financial impact of strategic changes and adjust forecasts accordingly.

When experiencing market fluctuations: Looking at variances can help the team understand how external market changes affect your financial performance against planned budgets. You can compare data from historical purchase requisitions or purchase orders to see where and how changes affect budgets.

At the start of budget season: Examining variances is a vital preparatory tool for beginning the planning process. It helps the finance team refine assumptions based on past performance.

Following major organizational change: Variance analysis is helpful during mergers, acquisitions, or other significant shifts in company direction. Considering variances at these times helps gauge their impact on financial health.

Examining these variances is especially important when comparing spending or production costs across departments or locations. Locations that purchase independently might create individual vendor agreements with varying terms and pricing. Getting a total picture of spend across locations also highlights the opportunity for volume discounts that improve your final pricing. Centralizing this data allows you to get a clear picture of how much you’re spending versus what you should be spending.

Tool

Variance Report Template

A variance report is a valuable tool to understand your spend and keep budget and actuals aligned. Use our template to track production and purchasing costs.

Download the tool

How to read and visualize a variance report

1. Examine expenses and revenues: It’s important that budget and actuals align — even for a beneficial category like revenue. Take time to look at both spending and earnings to identify areas where actuals deviate from expectations. While a bump in revenue is great, if it occurs alongside overspending, the end result is a wash. 

2. Identify relevant variances: Focus on changes between actual results and budgeted or forecasted figures. Take care to examine all relevant variances, not just big-ticket items. A collection of less significant but persistent variances, like a minor purchase price variance (PPV), still signals an opportunity to address assumptions or align spending. 

3. Review non-financial metrics: Understand how non-financial metrics might impact financial outcomes. This could include changes in customer satisfaction scores, larger market trends, or outside forces affecting production, productivity, and materials costs.

4. Assess assumptions against outcomes: Compare initial assumptions made during the budgeting process with actuals to gain context on performance. Understanding where theories deviate from reality can improve future forecasting accuracy.

5. Visualize data for better understanding: Utilize charts and graphs to visualize trends over time. These might be comparisons between budgeted and actual figures or among different business units/departments. Visual data can help the team grasp complex information at a glance.

6. Plan corrective actions: Finally, use your findings from the variance report to plan corrective actions where necessary. Whether adjusting budgets, changing operational strategies, or addressing inefficiencies, informed decisions can help get your business back on course toward its financial goals.

Common variance reporting challenges 

Variance reporting is straightforward — if you have the data. Many companies struggle with identifying and addressing variances simply because they don’t have a full picture of the financials across departments. When digging into variance reporting, most organizations stumble over one of seven common obstacles. 

Inaccurate or missing data

You need all the information to see where things stand. Bad or missing data can cause analysts to overlook important clues or to draw the wrong conclusions. The business can’t identify discrepancies, assess performance, or make informed decisions if the data is wrong or incomplete.

Departmental data silos

Decentralized data management often causes data to get trapped within a department or location. These information silos create barriers to data visibility, preventing analysts from getting a clear view of financial performance. Since the team doesn’t know the data exists, they calculate variances and make recommendations based on a fragmented understanding of the business.

Slow reporting 

Manual data management is time- and resource-intensive, making all processes take longer and creating lags between when events occur and when they’re reported. The data delay (and decay) inherent in manual reporting means teams may not catch variances for some time. This reporting holdup can create significant cash leaks, making it harder to course correct and bring things back in alignment.

Poor budget context

Variance reporting rests on the foundation of budget preparation. If you’re unsure of the rationale for building previous budgets, it’s hard to discern the reason for variances or what to do about them. Lack of historical insight diminishes the team’s ability to adjust forecasts or perform root cause analysis, limiting the ability to recommend strategies. 

Weak communication

Communication is an important component of most financial planning activities. It bridges gaps in understanding, allows teams to see and contextualize discrepancies, and facilitates collaborative problem-solving. Organizations with weak interdepartmental communication may struggle to report and address variances since teams are likely missing opportunities to share data and insights.

Missing variance relevance

Cherry-picking insights or putting too much emphasis on major variances may lead to a limited understanding of the finances. Though minor discrepancies aren’t as apparent in the aggregate, they may reveal systemic issues and prove just as damaging over time. Focusing on an overly narrow field of vision increases the risk of missing underlying problems that could impact long-term sustainability. 

Lack of action planning

Identifying variances is only half the equation. Teams must take what they find and translate it into actionable insights. Often, it’s more effective to identify variances early on — before remedying them with action becomes necessary. 

Tool

Variance Report Template

A variance report is a valuable tool to understand your spend and keep budget and actuals aligned. Use our template to track production and purchasing costs.

Download

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Try our free variance analysis template

If you want to get a snapshot of your spending and earnings to get a clearer picture of your financial performance, download this simple variance analysis template. 

To access your copy of our free variance analysis template: 

1. Enter your information to receive your form via Google Docs or Excel
2. Save the document as a new copy
3. Fill in the relevant information in the form
4. Get a quick snapshot of your budget versus actual performance

How to avoid manual variance reporting altogether

Variance reporting is an effective tool for bridging the gap between expectations and outcomes, but we can all agree that the best variance is the one that never occurs. 

One of the biggest areas of variance for most companies is indirect spend. A procurement platform like Order.co centralizes indirect spend analysis in a powerful, streamlined system for full visibility, easy approvals, electronic payments, and accurate real-time reporting. 

Want to eliminate variance uncertainty in favor of streamlined procurement and spend management? Schedule a demo of Order.co today.