B. Trend variances – small, continual changes over time, that incrementally diverge from expected.
- this month’s v last month’s
- August 2010 v August 2011 – both acutals and budgets
What can seem normal, can seem so because we are used to it. Trend analysis is a bit like watching your weight; when you check your scales each day, it only seems like tiny changes, but if you look at this birthday compared to your weight last birthday that is when you notice the few extra kilos have snuck on … Trend analysis puts a spotlight on the changes that creep up on us little by little.
Tip 3. Understand the TIMING – ask the question “WHEN is there a difference?”
Sometimes differences arise simply because of a lack of information entered into your systems.
What typically happens is that a relevant invoice has not yet been received or a payment relating to this period was made in an earlier period. In either case variances will arise in both the month the invoice was expected and not received, and the later month when the invoice is entered but not expected.
The idea of ‘Accrual accounting’ is to recognise all the income and outgoings for the period in that same period, irrespective of whether or not cash has actually passed between customer and supplier.
Timing variances “reverse” because what was short this period will appear in the next, or what was extra in this period will be missing next period. i.e. when the two months are added together, you end up in the right spot overall. As long as they are explainable as “reversing” in the next period, other than ensuring the expected reversal takes place then no further action need be taken.
Tip 4. ANALYSE the reason for the Variance – asking the question “WHY is there a difference?”
The most powerful question you have at your disposal is WHY did this variance occur?. The difference could simply have arisen because of a data entry typo – don’t panic or go yelling and the wrong people for the wrong things! Begin by making sure what you are looking at is accurate.
In all other cases a Budget Variance is the result of either:
* A price that was different from expected/budgeted
* A volume (amount) that was different from expected/budgeted
To be able to take any corrective action you must work out which element, or both, are involved…
TRICK: Ask “WHY” more than once, it can take up to seven times of asking WHY to drill down to the real cause that needs to be addressed – stopping too soon may mean you don’t get to the bottom of the issue and this will mean that any changes you try to make will be targeting an incorrect area. This part requires quite a bit of patience from both the questioner and the answerer, a bit of lateral thinking and investigation, and also an understanding that “I don’t know” simply means more research is needed.
Tip 5. Take Action – ask the question “WHAT do I need to do next?”>
So once the root cause of each variance is understood the final step is to take action – Reports should drive profitable decisions and variance analysis is no different.
What you need to do will be guided by the Where, When and Why of each variance. In some cases, especially with trend variances, no action needs to be taken until a pre-determined ‘tipping point’ is reached.
Some things to consider include:
- BUDGET – Do you need to adjust your projections because your budget was overly optimistic?
- REVENUE – Do you need to change your prices, volumes or sales process?
- CUSTOMERS – Do you need to increase your marketing, change product mix, focus on quality?
- WASTAGE – Do you need to adjust your processes to make them more efficient and effective?
The value of variance analysis lies in your ability to isolate changes and take remedial action quickly. Every business report exists to help you make better decisions; your budget is no different – if your business is not working as planned analysing your budget acts as a window enabling you to see what is going on and take the appropriate actions.