The last thing I want to see when I’m reviewing my financial statements is a variance. I should be more specific – the last thing I want to see is a negative variance when I’m reviewing my financial statements.
However, I’m the type of person that likes to see the glass half full rather than half empty. Finding a variance is not a bad thing. In fact, it really indicates that you are thoroughly evaluating your financial statements, which is a positive process. It is a process that should either be routine already, or a process that might need to be implemented as routine.
What Positives Come From Variance Reporting
Reviewing variances on a regular basis (at least quarterly if not monthly) can lead to significant savings at year end and lend itself to a less stressful budget planning session in the future.
- Any variance is an indicator that you may need to adjust course. Let’s assume that you and your department heads review your financial statements on a monthly basis. You quickly glance at your ending net income, and your bottom line is in the black. You think to yourself, “This is great. Everything is on course for a terrific year end!” However, what you could be missing are material variances in specific line items of your budget that could drive you off course for a disastrous year end. By identifying those line item variances early, you could head off a serious situation.
- You will be able to reallocate resources. By routinely reviewing variances by account and by line item, you will be able to identify those specific expenses that have become a drain on your operating income or vice versa. In the case of an expense that, let’s say needs more resources, you can easily move additional revenue to that item. If you are able to identify these line items throughout the year and reforecast your budget, your year end will be much more in line with your budget.
- Use your variances for next year’s budget planning. As you review your variance reports, make comments along the way for next year’s budget. Did something work well that you want to continue for next year? If not, is there a change you want to make to a process or workflow in a particular account? Give yourself hints and insights into your variances for next year’s budget. You will be thankful that you did!
What To Do About a Negative Variance
#1 – Don’t Panic
If you are coming across a negative revenue account or an expense account that seems unusually high, don’t get worried. You will need all of your senses to find the underlying cause of the variance and trace it back to its origin.
In the instance that it was human error, you can use the opportunity to exercise your patience and get your team the additional training they might require to avoid future errors. If the variance was caused by unpredictable economic changes, use that information to re-examine your budget and reforecast your data.
#2 – Drill into the Detail
Having the ability to dive directly into your ERP source data from a variance report is critical. Some tools like Dynamic Budgets offer a split screen drill down feature where you can see your live linked ERP actuals and your line-item detailed budget information in one pop up window (see example below).
Don’t forget to leave yourself some breadcrumbs along the way so that when you are budgeting next year or forecasting throughout the year, you have the information on variances at your fingertips to utilize.
Whatever the tool you use, make sure you have the ability to quickly and easily drill down into a variance to find its root cause, and correct it timely.
#3 – Use what you’ve learned
As mentioned before, leave yourself enough hints while you are analyzing your variances so that you know how certain accounts might change for your upcoming year. This will be useful when you are in the middle of your budget process and might need to adjust items due to events that have taken place.
Take an opportunity to train your Finance Department on using reports and other tools to spot check posting errors, and review repeated errors with them so they are aware what to watch out for. Provide them with online resources like GPUG through Dynamic Communities. Here they can access articles, training, webinars, and post questions on the user discussion board.
What Not To Do
Be mindful of your company culture. Incentivizing zero variance may not lead to the desired result, and you could get distortions in the timing of your variances. Rewarding zero variances may also prevent your team from overachieving (deterring from reaching revenue goals and only manipulating expenses). Whether a variance is good or bad, they can be used to tell a story. The good news is that you can adjust that story and have a positive outcome in the end.
Using Dynamics Budgets for Variance Reporting
Companies choose Dynamic Budgets for variance reporting because it’s easy to setup, easy to learn, and easy to use. We’ve seen the good, the bad, and the ugly! Our Variance Analyzer uses live links to ERP systems like Dynamics GP, so users can drill down directly into the details. Contact us today to schedule an in-depth demonstration using your own data! We can install our application and show you live linked variance reports in as little as 2 hours.