Budget to Actual Variance Analysis
If you are an accounting, finance or data science professional, you might be familiar with the term ANOVA. No, it’s not the name of a star in our solar system or one of Elon Musk’s children. ANOVA stands for analysis of variance, which is commonly referred to in financial planning and analysis (FP&A) as variance analysis. Variance analysis is the examination of actual results for a period (usually monthly), measured against the projected targets set in the forecast or annual budget.
The budget variance analysis formula and percentage are calculated as:
Actuals — Budget = Variance as a dollar amount
(Actuals / Budget) -1 = Variance %
You can apply these same principles and formulas to calculate other variance analysis results, such as material or labor costs and other overhead costs incurred by the business.
TIP: It’s important to always include a variance percentage for your results because a percentage can be compared equivalently across metrics, where a dollar or other currency value, requires a reference back to the budget or forecast amount for context. Increasing annual labor costs for the company by $2 million dollars doesn’t tell the same story as, labor costs increased by 10% and are within the total budget by 2% or a variance percent of 98%.
What is the Purpose of Variance Analysis?
Variance analysis is necessary to measure an organization’s progress while encouraging accountability. Using the actual and variance results across the company, each stakeholder is operating from the same scoreboard. Budget owners and decision-makers use the insights from variance analysis to adjust course and align strategies to improve outcomes and pace appropriately towards the targets.
Monthly analysis is the foundation of any high-quality FP&A process, and a great place to start. Despite recent trends to rely solely on forecasting, our finance experts highly recommend you never abandon the annual budgeting process and supplement it with monthly forecasting. Then you can track actuals against the monthly forecasts and the budget. This is the basis for your variance analysis and necessary for budget owner accountability.
For example, your analysis might reveal revenue trending favorably over the forecast, but expenses and gross profits are pacing negatively. Assuming your business is a profitable operation, the negative profitability could be the result of higher customer acquisition costs or an increase in your costs of goods sold. Analyzing the correlations in your variances will help shape the narrative of the health of the business.
A Guide of Variance Analysis Examples
- A comparison of the previous month’s actual results with the most recent forecast of the results for that month. For example, if your last forecast was the 9+3 (Jan-Sept actual and Oct-Dec forecast for a calendar-year company) then the comparison would be of actual results for October compared with the predicted October results included in the 9+3 forecast.
- A comparison of the year-to-date (YTD) results compared with the year-to-date budget. For example, using our preferred Accountability-Based Forecasting (ABF) approach of the 10+2, this would be a comparison of the October YTD results compared to the October YTD budget.
- A comparison of the updated full-year forecast to the full-year budget. This is the culmination of the forecasting and analysis cycle. You have completed items 1 and 2 above, and used them to inform an updated forecast which includes actual results for October, the 10+2. A comparison of the 10+2 full year outlook versus the full year budget tells management whether they are on track to achieve their annual goals.
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Quality Analysis Begins With Quality Data
The answers you need lie in your data; As long as you can organize, interpret and communicate your findings effectively. Controlling your data requires you to define the sources of truth from your range of disparate systems, extract the data and stage that information to be ready for efficient processing.
Typically, this process meant manually exporting files from your systems, such as your ERP (Netsuite) and CRM (Salesforce), and importing the data into spreadsheets.
Analyzing budget and forecast to actual variances and re-forecasting will provide managers with enhanced insight into the future potential performance of the business. There are many ways to analyze variance, and most use Excel as a starting point.
Excel is tremendously flexible and capable of producing insightful variance analysis — as long as your data is structured and reliable. Many finance professionals regrettably spend hours each day aggregating and processing their data. The inefficiencies compound as your data sets grow larger and your ERP doesn’t offer the reporting structure necessary for analysis. This is where a tool like FutureView Foundation comes into play.
Foundation integrates directly with your ERP, extracts your transaction details, automatically structures and stitches together the data so it’s processed and ready for reporting and analysis in Excel via our add-in. The dynamic integration means you can refresh to the latest financial data with a single click.
When you have to pull together data from multiple systems and even your own internally built platform, a modern FP&A Software is the ideal solution. The FutureView Platform can automate your variance results, so you can focus on deep analysis to unlock strategic insight. It leverages OLAP technology, so you can slice-and-dice your data in three-dimensional versions — like pivot tables on steroids.
Other tools pipe the information from your systems into your intended BI tool, with extraction automations. Although these integration tools (Fivetran or UiPath) eliminate manual exports and provide a data warehouse for multiple systems, it offers little direct value for the needs of finance and analysis. This is because the real value lies in the structuring and staging of your data from your systems and preserving that automatically with the integration.
Remember, your analysis should inform budget owners and business partners. When these stakeholders determine strategies for their business unit, it is your analysis and recommendations fueling those decisions. This is why the accuracy, and quality of your data are imperative for insightful analysis.
If you’d like to learn more about our FP&A tools, built by finance professionals, schedule a demo with one of our experts today.
