Financial planning is an important component of sustaining and accelerating your company’s growth. Your finance department, key stakeholders, and team leads spend a lot amount of time preparing, reviewing, and approving the budget, but their job doesn’t end there. Once the budget is in place, it’s important to compare how performance with expectations. This is commonly called Budget versus Actual analysis (BVA).
BVA is a subset of variance analysis and provides an overview of how your business is doing in a given period compared to how you thought it would do. It can highlight where there were deviations from the plan, what your strengths and weaknesses are, and what to focus on to improve financial performance.
No matter how prepared you are, there will always be differences between your plan and what actually happened. But by analyzing these variances, you’ll gain a far better understanding of how to course-correct and how key inputs at your company interact with each other.
Defining Variance and Budget versus Actual analysis
Simply put, variance analysis is the analysis of differences (or variances) between two data sets.
BVA is a subset of variance analysis and represents the comparison of the actual results for a period in the past with the approved budget for that period. It’s usually expressed as a percentage difference or total difference.
What are the reasons behind variances?
The purpose of variance analysis is to identify and understand why the variances arose. Variances can happen because:
- You’ve made inaccurate assumptions
- There are unanticipated changes in your trading environment (the impact of COVID on the airline business)
- Timing differences (an event happened in a different period from the period in which it was budgeted to occur)
- You relationship between drivers in the model have not been modelled correctly
- There are errors in your model
Variance analysis can help you gain a better overview of your business’ financial performance. Let’s say, for example, that you’re unsure about the relationship between new leads generated by marketing spend and sales. Variance analysis can help you gain better insight into these relationships so you can make better decisions to drive future success.
What can you learn by analyzing variances?
Variance analysis can identify insights you may not have been aware of previously. For example, marketing spend on online platforms is generating five times as many leads as marketing spend on conference attendance. Now you know how to improve the mix of your marketing spend to improve your performance.
As the previous example shows, comprehensive variance analysis that drills down into key business segments can highlight insights to improve business performance.
Let’s consider some further questions that may arise as we perform variance analysis on our sales performance:
- Why are our sales numbers better in Asia than in Europe? Is it because we’re offering our core product to a bigger market or because the Europe sales team has a lower conversion rate? If it’s a lower conversion rate, why is this?
- What is the reason behind the drop in sales efficiency? If we’re investing more in sales and marketing than before, is it down to inefficient sales teams or ineffective marketing initiatives?
- Are the variances a result of our own weaknesses or are there unforeseen factors on the market we hadn’t prepared for?
Variance analysis helps you drill down deeper into your data to answer questions like these. It allows you to segment your revenue by location, industry, revenue source, and many other factors.
The leadership team can then act on this information and course-correct. When you drill into a 5% adverse Sales variance, you may find it’s not a global issue. Instead, you might discover that your Asia team outperformed their forecast by 10% but Europe underperformed by 15%.
In this case, the leadership team would focus on understanding the reasons for the European underperformance, whilst trying to learn the positive lessons from the favorable Asian performance.
Variance Analysis and BVA are highly valuable tools
The most effective organizations are continuously receiving, reviewing and acting on new information to prepare for upcoming challenges.
This is even more important in today’s unpredictable markets. COVID has highlighted the importance of understanding your business drivers on a more detailed level.
With a more complete picture of past variances and why they happened, organizations can stay on track and make more accurate predictions for the future. BVA analysis can help you understanding your key business drivers, the relationships between them, and how to evolve in the face of new challenges.
For the best way to perform variance analysis, review months’ and years’ worth of data with the click of a button, and arrange metrics how you see fit, feel free to book a demo with OnPlan.
Our software streamlines variance analysis. It gives every department and individual customized views of data they think is relevant, while filtering out everything else.
Schedule a demo now by clicking on the link below. We’ll show you how we can simplify your variance analysis and help you identify new operational insights to improve your business.