For SaaS businesses, recognizing discrepancies allows teams to pivot, correct, and innovate more responsively. Interpreting variance report results provides a roadmap to navigate the intricate financial landscape of software subscription models.
This article dives into variance reporting for businesses with SaaS-specific examples and in-depth insights. With this guide, you’ll learn how to harness the power of variance analysis reports with actionable steps you can use to ferret out insights, find meaning in the numbers, and fix what's broken in your financial strategies.
Let's turn those numbers into action!
What is a variance report?
Variance reports are used to document the differences between what you planned and actual results. The variance report is a written document usually included as part of the company's income statement. Think of it as a financial compass, pointing out deviations and helping you chart a more accurate course.
For SaaS businesses, growth often comes rapidly, making it imperative to compare the budget against real-world outcomes. This requires not only monitoring but acting on the results, which can make the difference between scaling seamlessly and facing unexpected financial pitfalls.
If you’re just getting up to speed with variance reporting, check out our step-by-step guide on how to create one. It isn’t a prerequisite for this article, just another great resource on the topic that you can use to make the most of your variance reports.
Key variance reports for SaaS companies
Here are some common types of variance reports used in SaaS companies:
- Budget variance report: Tracks deviations between estimated budget or forecast and actual expenses.
- Revenue variance report: Monitors differences in expected and actual revenues.
- Expense variance report: Analyzes fluctuations in predicted versus real expenses.
Spotting trends with variance reports
The ability to uncover trends and patterns in business performance is one of the standout benefits of variance reports. By comparing the budget to actual expenses over time, finance teams can decode patterns, identify insufficiencies, and leverage opportunities. Whether it's a sudden uptick in subscription cancellations or an unexpected surge in software adoption, variance reports ensure you're never caught off guard.
Key elements of actionable variance reports
For a variance report to be truly actionable, it must adhere to some foundational principles. Let's delve into the elements that set the bar for efficacy in variance reporting:
- Clear and concise data presentation: It's not just about what the data says but how it's presented. Clarity and precision in showcasing numbers and effective visualizations allow for quick comprehension and efficient decision-making.
- Actual vs. budgeted performance: Comparison is at the heart of a variance reporting. Variance reports identify the differences between projected outcomes and actual results. This comparison offers a lens into areas of high achievement, potential risks, and opportunities for course correction.
- Identification of key variance drivers: Making a variance report actionable hinges on pinpointing what's driving the changes. It's not just about spotting the variance; it's about understanding the why behind it. To navigate these waters effectively, you need to look at your data at a very granular level.
Let's look at an example. Revenue in SaaS typically operates at the formula of price multiplied by the number of subscriptions.
However, if a company offers two distinct subscription tiers, merely averaging out prices and subscriptions could lead to skewed insights. Instead, focusing on the product or subscription level granularity, such as multiplying the price of each tier by its corresponding subscribers, yields a more accurate depiction.
This granular approach helps determine whether a specific subscription level drives the variance or is a more widespread phenomenon.
How to turn variance report insights into transformative action
1. Conduct a thorough analysis of the variances
Variance is important because of its potential to guide and inform. Once the key drivers of a variance are known, the next critical step is to perform a root cause analysis.
A root cause analysis delves deep into the 'why' behind a variance, making sure businesses don't merely react to numbers but understand the stories and challenges those numbers reflect.
The goal? To pinpoint the actual reasons behind deviations, empowering businesses to address them at their source.
How to perform a root cause analysis
Begin by dividing the variance up into its primary components. From there, you question each element.
Has a particular aspect of your business shifted? Are there external market factors at play? Are technological challenges affecting the output? Each query should drive you closer to the root cause, unmasking the underlying reasons for the variance.
Let's take the Monthly Recurring Revenue (MRR) growth rate. Say it has seen an unexpected dip. Start with the basic components: New MRR, Expansion MRR, Contraction MRR, and Churned MRR.
If the dip is driven primarily by an increase in Churned MRR, then the immediate focus is on customer retention. Delve deeper.
Are customers churning from a particular pricing tier more than others? Are certain regions facing higher churn rates? Answering these questions could lead to insights about product satisfaction, market competition, or even customer support efficiency.
By deconstructing the variance and meticulously examining each layer, businesses can make sure they're not just reacting to numbers but proactively addressing the real challenges that lie beneath.
2. Prioritize the variances based on their impact and what you can actually control
Not all discrepancies are equal. When taking corrective actions, it's vital to discern which variances merit immediate attention and which ones require a strategic wait-and-see approach.
Prioritizing variances is much like triage in the world of medicine—addressing the most critical and impactful cases first.
Determine the relative impact of your variances
Start by gauging the relative impact of different variances. A high percentage in a low dollar amount might grab your attention. Still, it could be overshadowed by a seemingly modest percentage variance in a high dollar account.
Balance both the proportional variance and the actual financial magnitude of that difference to understand its true impact on your business.
Identify what drivers are within your ability to control
Understanding a variance is one thing; having the power to amend it is another. After diagnosing the 'what' and 'why' of a variance, evaluate your sphere of influence. Can you amend a particular process, or is the variance a result of external market forces?
It's imperative to differentiate between the controllable and uncontrollable.
Efforts are best channeled where they can make a tangible difference. If a variance is anchored in factors beyond your reach, acknowledge it and pivot your energy toward those you can impact.
Creating an action plan
With your variances prioritized, it's time to strategize. Develop an action plan tailored to each variance's nature and magnitude. For negative variances, this might involve mitigation strategies or process overhauls.
Conversely, positive variances offer a chance to amplify what's working, turning a favorable variance into a standard practice.
3. Set clear goals and benchmarks for each variance you plan to tackle
Acting on variances without a clear roadmap can be similar to setting sail without a compass—you might move, but not necessarily in the right direction. Establishing precise goals and benchmarks makes sure corrective actions are both targeted and measurable.
Benchmarks act as the North Star when evaluating variance. They help businesses answer the question of how much variance is too much variance and can help them know when they're on track or when a pivot in strategy is in order.
Collaborative communication is also essential. Variance can often be the result of multiple, interrelated drivers, which makes cross-departmental collaboration crucial to reducing it.
For instance, a variance in sales figures could be intricately tied to marketing efforts, customer support feedback, or even product development.
Fostering open communication channels and obtaining departmental buy-in becomes essential. Only with collective insight and effort can a business address the root causes and effectively move the needle on variances.
4. Assign responsibilities and follow up on actions
While identifying variances is a significant first step, ensuring meaningful, actionable responses is where the rubber meets the road. This is a collective journey, one that demands a clear delineation of responsibilities and rigorous follow-up.
The role of the CFO and finance team
The CFO and the finance team are at the forefront of identifying the actions needed to reduce variance. They are the first to detect the ripples of variance. However, their role involves more than just pinpointing variance. They dig deep to unearth the root causes and assess the potential ramifications each variance has for the business.
Engaging company leadership
Once the nuances of variances are decoded, the CFO steps into the strategic realm. The CFO engages with other company leaders, providing them a clear breakdown of which variances could redefine the business trajectory. This involves highlighting threats from unfavorable variances and showcasing opportunities revealed in the favorable ones.
Empowering teams to act
While the company leadership strategizes, ground-level execution rests with the individual teams or departments. They are the doers, turning insights into actions.
Whether it's the marketing team amplifying a campaign that's yielding favorable results or the operations team recalibrating processes to mitigate costs, each department plays a vital role.
Linking actions to KPIs
To make sure these actions aren't mere shots in the dark, they must be intricately tied to measurable outcomes—the KPIs. It's not just about acting but acting with a clear vision of desired outcomes.
By aligning variances with departmental KPIs, you gain clarity, focus, and a way to measure success.
It falls to the leadership in the company to mandate this alignment and ensure each measure taken is purposeful and results-driven.
5. Monitor and track progress regularly
By keeping a consistent pulse on progress, businesses can swiftly discern the success of their strategies. But this isn’t just about numbers; it's about adaptability. Real-time tweaks and recalibrations are often necessary to maintain your course.
In addition, monitoring builds a sense of accountability. When teams know they're accountable for results, they push harder, always aiming to top their previous best.
Monthly vs. quarterly tracking
Every business is unique. While some might find monthly tracking to fit their needs, capturing every minor shift and allowing for agile maneuvers, it's not a one-size-fits-all. Sometimes, the ripple effects of a decision or action might take more than a month to fully manifest.
Many businesses report quarterly, which is often more manageable especially for finance teams using spreadsheets to do their financial planning and analysis (FP&A). By aligning with the business quarter, teams have a bit more time to conduct the review necessary to determine the sources of variance.
Quarterly reporting also offers the opportunity to see if actions implemented in response to previous variances have had the intended effects. Sometimes, a bird's-eye view, letting actions fully materialize, offers a clearest view of where you're headed.
Best practices for creating actionable variance reports
To truly harness the full potential of variance reports, know that it's not just about crafting a report. It’s about making it sharp, insightful, and actionable. Think of these best practices as your toolkit, turning those reports from just 'nice-to-know' numbers into strategic insights.
- Determine the frequency and timing of reporting: Establishing a rhythm is crucial. Decide whether monthly, quarterly, or another time frame suits your business needs best. The frequency should align with your business cycle, allowing timely interventions and strategic recalibrations.
- Tailor the reports to different stakeholders: Customize the depth, detail, and presentation of your reports based on the audience. While leadership might require a strategic overview, operational teams can benefit from granular data insights.
- Explain what led to each variances and provide context: Numbers alone can be misleading. So, accompany significant variances with explanatory notes, offering context. This demystifies the data, enabling stakeholders to grasp the meaning in the numbers.
- Include historical data to help identify trends: Variance reports aren't just about the present; they're windows to the past and can provide direction for the future. Businesses can discern patterns, cyclical trends, and anomalies by comparing current data with historical metrics. This historical lens can be instrumental in forecasting and strategizing.
- Regularly review and refine the reporting process: The business landscape is dynamic, and so should be your reporting process. Periodically reassess the metrics, format, and utility of your reports, refining them to better align with evolving business goals and challenges.
Navigating the intricate maze of the SaaS business landscape requires more than intuition; it demands data-driven insights. Variance reports provide this and if used to their full potential, can provide vital catalysts for positive change.
Acting on the insights provided in variance reports unveils a ton of opportunities that SaaS businesses can harness. These reports highlight operational nuances, financial discrepancies, and strategic pivot points. By leveraging these insights, companies can fine-tune their strategies, optimize operations, and maximize profitability.
Conversely, ignoring the goldmine of data within these reports is similar to watching an opportunity fade into the horizon. Every variance report left unattended and every anomaly left unexplored represents potential growth left on the table.
To the forward-thinking SaaS business owner, let this be your clarion call: integrate variance reporting into the very DNA of your decision-making process. Let it serve as a mirror reflecting your current status and as a compass guiding your next move.
And for those seeking a seamless transition into the world of variance reports, Drivetrain makes it fast and easy to make variance reports actionable in your business.