Mastering the variance report: a step-by-step guide for SaaS businesses

In the fast-paced SaaS world, the ability to know when you’re veering off track is essential. One wrong turn can have potentially devastating consequences for your business if not caught and corrected early. Having the ability to spot and leverage new opportunities in the market quickly can help you significantly accelerate growth. 

Looking at variance can help you do both, especially when you understand the different kinds of variance in financial reporting and what they can tell you about your business.

Variance can be defined as the difference between the actual performance and the projected or forecasted performance. A variance can be either favorable or unfavorable, and both can provide key insights into your business.  

This guide will explain what a variance report is, types of variances relevant for SaaS businesses along with best practices, as well as how to create and use a variance report to make better decisions in your business.

‍What is a variance report and why are they important?

A variance report is one of the financial statements companies use to communicate financial data to their board and investors. It is a typically written document, presentation, or a combination of the two, included as part of the company's financial reporting. 

Companies can use variance reports as a management tool to make data-driven adjustments to their operations to achieve greater efficiencies and better financial performance.

Variance reports are used to document the differences (variances in absolute terms) between actual results and what you planned or forecasted. 

Note that in the parlance of variance reporting, the terms “positive” and “negative” refer to the actual number associated with variance. If the actual value is greater than the projected value, the variance will be a positive number whereas, if the actual value is smaller, the variance will be a negative number. 

In contrast, the terms “favorable” and “unfavorable” refer to what a variance means for your  business. Thus, variance reports may show both positive and negative variances, each of which will be characterized as either favorable or unfavorable.  

Favorable variances can pinpoint high-performing sectors that could benefit even further from additional investments. On the other hand, unfavorable variances can point you in the direction of bottlenecks that might be negatively impacting your performance.    

What does a variance report contain?

A typical variance report comprises several key components:

• ‍Actual vs. budgeted or forecasted figures: This is the foundation of the variance report, detailing what was expected versus what actually occurred in terms of revenue, expenses, and other financial metrics.‍
• Variance analysis: This part goes deeper into the numbers, to identify the variances and explore why they happened. A variance analysis digs into the reasons for discrepancies. Understanding why they occurred reveals insights that you can use to make data-driven decisions about how to improve your business.‍
• Identification of key drivers: Drivers are, as the name suggests, the things that are driving a given variance, such as market fluctuations or operational inefficiencies. Notes explaining these drivers are typically included in the report, offering invaluable insights.

SaaS companies frequently go through every line item in their accounting system each quarter to look for financial variances, aiming for a comprehensive understanding of financial performance and to provide full transparency in reporting. 

Why do SaaS companies need variance reports?

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.

• Variance reports, which are documents companies create to identify and explain variances in the business, serve as an invaluable tool for interpreting your company’s overall financial health. They offer vital clues about areas requiring immediate attention. 
• Public SaaS companies are under legal mandates to provide detailed information on variances in their financial disclosures to auditors. Even private SaaS companies, while not legally bound, routinely share variance reports along with other SaaS-specific metrics with their board and investors.

• These reports aren't just bureaucratic formalities; they're the triggers for change, providing actionable insights that empower you to make data-driven decisions to propel your business forward. 

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, regular variance reporting helps to ensure you're never caught off guard.

Two key types of variances SaaS companies need to track

There are two different types of variances that are important for SaaS companies to look at to fully understand their business: financial and operational variances. 

• Financial variances include comparing your actual results with expected results planned or forecasted for individual line items in your profit and loss (P&L) statement, commonly referred to as the income statement) and your balance sheet. 

Financial variance reports are used to analyze the health of your business and reveal differences between the budget and the actual expenses the business incurred over a specific period, which can point to potential issues or unexpected cost savings. 

• Operational variances pertain to how the company is doing in terms of its strategic goals as opposed to financial performance. These could include any of the SaaS metrics your company is tracking, such as customer acquisition costs (CAC) or monthly recurring revenue (MRR). As most SaaS metrics are calculated from two or more financial line items, these reports provide a deeper, more subtle view of your operational performance.

Understanding what variance reports are and what they tell you about your business is essential for smart management. Whether you're interpreting balance sheet or income statement variances or analyzing variances in key operational metrics, variance analysis will help you make more informed, data-based decisions. 

The following sections will cover the common types of variance reports for SaaS companies and provide examples of each, starting with financial variances. 

Common types of financial variances

There are two types of variance reports that show financial variances. One is the income statement variance report and the other is the balance sheet variance report. As their names suggest, these reports show variance in key line items on the income statement and balance sheet.  

Revenue variances 

Revenue-related variances are reported as income statement variances. This type of variance shows the difference between projected and actual sales. 

There are three types of revenue variances: sales volume variances, variance in customer base, and price-related variances. 

Sales volume variances 

Sales volume variances (also known as sales variances) can help you determine whether your sales strategies are effective. Sales volume, which includes the number of new bookings – the new customers you’re winning – is closely linked to your annual recurring revenue (ARR), a key metric for every SaaS company. 

In SaaS, the role of sales volume, specifically new bookings, is crucial. This is because the SaaS industry is based on a subscription model where customers are paying on a recurring basis. So, one customer can turn out to be a significant revenue stream over time.

Variance in customer base

Variance in customer base is the difference between your projected and actual customer base. This type of variance helps businesses understand whether their customer acquisition and retention strategies are working or not. 

Success in SaaS is highly dependent on the number of customers you have, more so than the size of their contracts. The latter is important too, of course, but it’s vitally important to your business to pay attention to any variance in your customer base. 

If your customer base is growing, knowing what’s driving that growth gives you an opportunity to double-down on those activities. Whereas, a decrease in your customer base means you need to take a closer look at churn in your business.    

Price-related variances

Unlike other types of variance, price variance is rarely a surprise. After all, you know when you’re changing your prices and what the potential impact will be. The value in tracking price variance is that it can help explain other variances you find elsewhere in your variance reporting. 

For example, imagine you’re a subscription-based streaming service, and your revenue tripled from one quarter to the next. You already expected a favorable revenue variance because you recently raised your price from $7.99 to $15.00 per month, which almost doubled the revenue from each customer. 

While your price change doesn’t fully explain the total revenue variance, it leaves you with far less to investigate in your variance analysis and explain in your reporting. 

Cost variances 

Like revenue variances, cost variances are also reported as income statement variances. 

Cost variances are simply a difference between your projected costs and actual costs, and they can offer actionable insights into how your business is spending its cash.  

While there are many different expenses you could track for the purposes of variance reporting, two of the most important types of cost variances to track are your hosting costs and marketing costs. 

Hosting costs

Cloud hosting costs are a significant and often highly variable line item in the budget for SaaS companies. Cloud cost varies based on a number of factors. Usage is a primary driver that can significantly impact the actual cost of hosting and may help to explain a difference between the actual cost and the budgeted amount.

It’s important to interpret variances in cloud hosting cost carefully, though. A positive variance (spending less than projected) represents money saved, but it may also be a red flag. 

For example, if the total cost incurred for hosting went down, it could be due to an increase in churn or lower customer engagement with your product (often a precursor to churn). So in this case, what seems like a favorable variance may actually indicate a serious problem.  

Likewise, spending more on cloud costs than you planned would technically be a negative variance. However, if that variance was driven by an increase in your customer base, that may actually be a favorable variance (a good thing) for the company. More customers do mean increased hosting costs, but they also mean more revenue.  

Marketing costs

Marketing costs are also a significant expenditure for SaaS companies. While critically important to the business, marketing expenses are more discretionary in nature. Most variances in marketing costs are a function of changing priorities and resulting spending decisions. 

For example, you may have decided to invest in a new and important event sponsorship opportunity that wasn't on the radar when the budget was created. Since that event wasn't in the budget, the expense would create a variance because you spent more than you planned. 

Variances in marketing costs can also sometimes occur as a result of unforeseen circumstances. Perhaps an event that you planned to sponsor was canceled. That would also result in a variance because you spent less than you budgeted for that line item.   

In either case, understanding the reasons behind variances in marketing costs is usually pretty straightforward. 

Asset variances 

Asset variances can help you determine where your company stands financially and what steps may be needed for future growth or stability. 

For SaaS companies, the most important types of  asset variances to watch for are cash on hand and intellectual property (IP), both of which are reported as balance sheet variances.   

Cash on hand

Cash on hand is one of the most straightforward yet crucial types of variance to monitor in a SaaS business. Many different factors can influence your cash on hand, from operational cash flow changes to strategic business decisions like mergers or acquisitions. 

A favorable variance, where your cash reserves are higher than expected, could signal efficient operations or improved revenue-generating activities. But, in the broader context, interpreting cash on hand variances with such a favorable outcome may require a deeper analysis to know what it’s really telling you.

For example, was the difference the result of the loss of an unexpected loss of staff? If so, the variance may in fact be pointing to a potential problem. In this case, while the variance appears to be favorable, the underlying reasons for it are not. However, if the variance is the result of new efficiencies in the business that created cost savings, then the variance is truly favorable in every sense of the word. 

On the flip side, an unfavorable variance, where you have less cash than projected, could be a warning sign for potential liquidity issues. 

Intellectual property

IP is another critical asset variance to consider for SaaS companies, which includes software code, patents, and trademarks. 

An IP variance is the difference between the estimated value of your intellectual property and its current market valuation. Variance drivers in IP valuation can include legal costs, R&D expenses, and the perceived market value of your IP. 

If the difference between the actual value of your IP is greater than you accounted for, it could suggest your IP is gaining market recognition, validating your investment in R&D or branding. 

However, if the actual value is lower than expected, it might indicate depreciation in the value of your IP, prompting you to question whether it's adequately protected or leveraged.

Liabilities variances 

Tracking liabilities variances, which are reported as balance sheet variances, provide a view into your company's financial commitments.

Variances in interest payable and bonds payable are two of the more important types of liabilities variances for SaaS companies to track because these liabilities tend to be more variable than others.  

Interest payable

Interest payable represents the amount of interest expense your SaaS company owes but hasn't yet paid. Influencing factors can include the interest rates on loans or credit lines, the company's borrowing activities, and repayment schedules. 

A favorable variance in interest payable, where the amount owed is less than anticipated, could indicate prudent financial management or possibly better-than-expected terms on borrowed funds. However, this should be interpreted carefully; lower interest payments could mean you're not leveraging credit to make beneficial investments in your company. At the same time, an unfavorable variance might point to escalating borrowing costs or poor debt management. 

Bonds payable

Bonds payable refer to long-term debt instruments issued by your company to raise capital. Variance in bonds payable can be influenced by market interest rates, your company's credit rating, and investor sentiment. 

A favorable variance occurs when bonds payable are less than expected. This could signal that your company is effectively managing its long-term debt, thereby potentially increasing investor confidence. 

An unfavorable variance, on the other hand, could mean your company is struggling to manage its long-term liabilities, which may lead to heightened scrutiny from investors and analysts.

Equity variances

Variances in retained earnings and shareholders’ equity are two types of equity variance that are important in SaaS.   

A variance in retained earnings is the difference between the profit the company was able to retain versus the predicted amount it would be able to retain. And, shareholder equity represents a company’s net worth (i.e the difference between the company’s assets and its liabilities).   

Both types of variances offer insights into the company’s overall financial health and are reported as balance sheet variances.

Operational variances in SaaS metrics

In SaaS, tracking financial variances is critical to effective financial management of the business. However, there are also other, non-financial KPIs that can offer deep insights into the operational efficiencies (or lack thereof) in your business.  

The specific metrics to track will vary from business to business depending on their goals. While analyzing and reporting variances in operational metrics is often driven by compliance or investor expectations, there are a few metrics that are universally important to all SaaS businesses. Annual recurring revenue (ARR) and churn rate, for example, are two revenue-related metrics that are tracked by virtually every company in the SaaS industry. 

There are also many efficiency-related SaaS metrics for which evaluating variances can reveal deep and nuanced insights into different areas of your business. These include, among others, the SaaS magic number, SaaS quick ratio, and LTV:CAC. 

Let’s take a quick look at an example of what a variance analysis for a metric like LTV:CAC can tell you.  

Imagine your LTV:CAC ratio has changed from 4:1 last quarter to 3:1 this quarter. To understand the variance, you would first need to identify which part of the ratio has changed. 

If you find that your CAC has increased, the first place to look for the source of the variance would be your marketing and sales expenses. Doing so will help you pinpoint the specific costs that changed so you can adjust your strategy accordingly. 

On the other hand, if LTV has decreased, you would dive into customer behavior to figure out what's actually impacting the LTV. Are more of your customers downgrading, or churning, or both? And, once you know that, you can take a deeper look into the reasons behind it. 

It’s important to note that with variances in operational metrics, the answers may not be as clear cut as we might expect. In the example above, if it’s a decrease in LTV that’s driving the variance in the LTV:CAC, you might find that customer downgrades might simply be the result of a tighter economy. 

However, the reasons for the churn component of the variance might be more complicated. While some of your customers may be churning as a function of the economy, there may also be other operational problems driving some of that churn. Are your customers getting frustrated by a lack of support? Did you recently change your prices or pricing structure? These are just a couple of questions you might need to investigate to fully understand the variance in your LTV:CAC.   

Clearly, analyzing variances in operational metrics can be somewhat complex, not to mention time-consuming. However, you can’t fix problems you don’t see. By analyzing variances in key efficiency and other SaaS metrics, you can better understand what is driving them, which is the first step in addressing them. 

How to create a variance analysis report

Doing a variance analysis is a required part of creating a variance report and can take a fair amount of time. However, it’s worth the time spent because variances can reveal inefficiencies hiding in your operations. So, let’s walk through the process here.

1. Gather and analyze financial data 

When gathering the data for your analysis, it’s important to make sure you’re pulling all the data you need from all the different source systems in which it is maintained. You also need to verify that the data you’re getting is as current as possible and accurate. 

You’ll need both actual figures for revenue and expenses and budgeted or forecasted figures for comparison. 

Actual figures for revenue and expenses

Using accurate and up-to-date figures for both revenue and expenses is vital. However, gathering such data can be challenging, especially if it's spread across different systems like a CRM system, accounting software and various analytics tools. Plus, the frequency of your reporting, whether monthly or quarterly, can affect how up-to-date your data is when needed. 

Budgeted or forecasted figures

Having your budget or forecast handy is critical for comparison. Make sure these figures are current and consistent with your actual data in terms of the period you're analyzing.  

2. Calculate the variances 

The basic premise behind variance reporting is quite straightforward: A variance report compares the actual outcome for a given budget item or SaaS metric with what was projected or forecasted. 

Absolute vs. percent variance

Variance is calculated in two ways: absolute variance and percentage variance. This step is about spotting the gaps between what you expected and the reality.

Absolute variance is simply the difference between the budgeted and actual figures.

Having laid out the core principles and formulas for variance reporting, let's walk through a few practical examples to illustrate how they work together. 

Financial variance examples

Let’s look first at a revenue variance example. Here, we have a -10% variance in new bookings, which begs the following question: Are your sales strategies effective enough or have market conditions changed?

Now, let’s explore an example variance in cloud hosting costs. In this example, let’s say you projected that you would spend $45K on hosting but you only spent $42K, which resulted in a -6.7% variance. Somehow, your company managed to save some money in the last quarter on its hosting fees.

Did your engineering team do something that made your cloud usage more efficient? If so, that would be a favorable variance. Or, is that variance actually the result of increased churn? If so, that’s an unfavorable variance and something you need to address as soon as possible.  

This is a simple example that illustrates how being thorough in your variance analysis can reveal potentially critical, actionable insights you might otherwise miss.   

Example calculation of an operational variance

Churn is a metric of particular interest for SaaS companies. Churn can significantly impact a SaaS business in a couple negative ways – it's expensive in terms of the CAC incurred and the loss of recurring revenue. 

Note that churn is typically reported as a percentage. So, as you can see in the example below, the absolute variance is expressed as a percentage. However, to get the percent variance, you would need to use the individual percentage values for actual and projected churn. 

In this case, the absolute values can be deceiving. Looking at the % variance offers a much clearer (and alarming) picture of what's happening with your churn rate in your churn. A 40% higher churn rate calls for immediate attention to customer retention strategies.

3. Conduct a variance analysis

This is the step where you start digging into the data to understand what’s driving the variances you found in the previous step. You need to be able to explain the causes of those variances to surface the insights they can provide.  

For this, you’ll need to have a good understanding of all the different types of variance in SaaS that you might expect to encounter and their drivers. Try to uncover the reason behind the variance, the underlying driver. Was it a change in market conditions, an operational shift, an unexpected cost, or something else you did not anticipate? 

The objective is to identify the key drivers behind the variances, which are all the elements feeding into the specific metric or account you are examining.

Identifying key drivers

Understanding, at a deep level, all the potential drivers of variance in your business is critical because it will help you:

• More effectively explain them in your reporting address them
• Minimize them in the future. 

It’s only when you fully understand what’s driving your variances that you can begin to control them. 

This said, teasing out the root causes of variance can be difficult. To the extent that your variance report contains line items and/or metrics that have multiple potential drivers, the variance analysis can be highly complex. This is because you have to drill down into each driver and try to understand how they are collectively impacting the line item or metric. 

Let's consider a simplified example focusing on revenue. Generally, the key drivers for revenue are price and quantity. Therefore, understanding these drivers can help you pinpoint the causes behind any variances, be they favorable or unfavorable.

If you encounter a favorable variance in revenue, it could mean that either the price, quantity, or both have increased. On the flip side, an unfavorable variance might indicate that one or both of these drivers have decreased. It can also be a nuanced combination of increases and decreases in these factors. The key is to understand what specifically is impacting or driving the number you're looking at.

Collaborate with other teams to understand the results you’re seeing

Collaborating with other teams once you’ve completed your analysis is important for a couple reasons:  

• Working with the teams more directly involved in day-to-day operation of the business can help you calibrate your conclusions about the root causes of a given variance.
• Because they are the ones “in the trenches,” discussing relevant variances with them can reveal new drivers or other factors you might not have thought of during your analysis.

Making your variance analysis a collaborative process will also make implementing the operational changes that might be needed to better control variances in the future easier. When changes are required, the teams that are being asked to make them will understand their rationale.  

It’s worth noting here that financial management and reporting solutions that offer in-app communication features can significantly streamline collaboration across the business, allowing you to share information with different teams directly within the platform as opposed to having to navigate multiple email chains.

Analyzing business impact

After identifying the key drivers behind the variances, analyze their impact on the overall business performance. For instance, a favorable variance in revenue might allow for increased investment in marketing or R&D, potentially leading to even higher future revenues. Conversely, an unfavorable variance might necessitate budget cuts or strategic shifts.

4. Create a variance report

After analyzing variances, it's time to present your findings in a single, final report. This report should note all the variances identified, provide an explanation for each, and include a discussion of their potential impact on your company. 

Here are a few tips to help you create your final variance report:

• Presenting results in a slide presentation is a common practice that pairs well with a written report.
• Ensuring your report is clear and concise. While you will report on all variances, focus more attention on those that matter most to your audience. 
• Using tables for numerical data and enhancing comprehension with charts or graphs. For example, a bar chart can depict revenue variances clearly.
• Sharing notes on variances. When you write a variance report, you'll make notes for every variance, explaining what led to the variance and what it means for your business. This commentary turns your data into actionable insights.  

5. Maintain a consistent reporting schedule

Effective variance reporting requires consistency. While most SaaS companies conduct quarterly reviews due to the workload involved, monthly evaluations can offer more timely insights, especially during your month-end close. 

Drivetrain facilitates this monthly cadence, and provides the ability to run ad-hoc variance reports that can be invaluable for emergency scenarios or to answer specific business questions.

Leverage technology to find the insights hiding in your variances

Most of the examples in this article regarding the different types of variances are somewhat simplistic. However, conducting a variance analysis for a line item or metric that has multiple potential drivers can be a daunting prospect. While the process itself is pretty straightforward, relying on spreadsheets to analyze the data variances can be very time-consuming and prone to manual errors. 

Modern FP&A software and tools eliminate all the manual work that spreadsheets require, automatically consolidating all your data in a single platform to make the whole process, from variance analysis to reporting, whole lot easier and faster. 

Drivetrain, a purpose-built FP&A platform, makes even the most complex variance analysis simple, with advanced features such as automated data collection, real-time analytics, and customizable dashboards that allow for effortless interpretation of variance report results. 

With Drivetrain, you can continuously monitor all your key metrics, including any custom metrics, in real time so you can quickly uncover issues and seize opportunities. 

If you have the time and technology to dig deeply into your variances, you’ll discover gold—the kind of insights that you can use to make sound, data-driven decisions to keep your business on track and move forward faster toward your goals.

To learn more about how Drivetrain can turn your variance reporting into a catalyst for sustainable growth, contact us for a demo today!