The Purpose of an Accounting Variance Analysis
If you have never heard of a variance analysis in accounting and are a business owner, then you're in for a treat in terms of how this valuable analysis can help you understand what is happening with your business.
By definition, an accounting variance analysis looks at the differences in financial numbers for two or more periods of time. For example, the picture to the right is a portion of a completed Income Statement variance analysis for the first six months of 2021 versus the same time period of 2022.
The purpose of the variance analysis is to be able to explain the differences in dollars between the two periods of time, by account. For example, note that 4000 Sales fell by $200,000 from last year same time, to this year. As the Chief Financial Officer (CFO), I first ensured that the 4000 Sales Account was accurate through my month end close processes. Therefore, a detailed revenue reconciliation was done before this to verify that every transaction in the account was correct. Once I had established that the account was correct, I could see the revenue performance for exactly what it was, a drop of 12% in sales from last year to this year. In this specific case, we were seeing how macro economic conditions were affecting the sales of the organization.
Another good example is why 4112 Discounts had increased from last year to this year. The problem with the increase was that it did not produce more sales than we would have liked it to. With this piece of information, I asked my store managers to look into their discount practices as the percentage of discounts used to create the revenue for the period, went from 1.6% to 3.6%, which was a huge jump. Just this example can help a business dial in specific actions such as what discounts are more effective to create revenue. Specifically, what discounts were used last year that were so effective?
As we move down the Income Statement, we can see payroll jumping by $215K. Because we had such a drop in revenue, we should have seen less in payroll costs. This was explainable as there was a new business unit established in 2022 which had $375k in payroll expenses so far this year, which means that the other stores did, in fact, have a decrease in payroll expenses. This analysis can be then drilled down further to look at what is happening at each store location.
Notice in the section 6100 General & Administrative, that there was only a decrease of $1K overall, but see how 6114 Dues & Subscriptions jumped by $8K between the two periods. As the CFO, I have to understand if the costs running through this account were actually helping produce income and, if not, why were we spending so much when sales were down? An action step here would be to decrease the budget on these specific expenses.
This type of account by account variance analysis sees the business on a granular level and allows the decision makers to be able to create specific action steps to mitigate the problems identified in order to create better financial performance of the business. This is the main purpose of an accounting variance analysis.
If you believe this type of service could benefit your business, please visit my contact page to start a dialogue about how financial analysis can help you make better decisions about your business.
Blue Collar CFO