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

Learn what a variance report is, how to create one, and how and use the results in your business to identify hidden issues and new opportunities.
Kirk Kappelhoff
Guide
September 13, 2023
11 min
Table of contents
What is a variance report?
What does a variance report contain?
What types of variances should a SaaS company be looking for?
Steps to create a variance report for your SaaS business
Using your variance report to drive improvements
Best practices for variance reporting in SaaS businesses
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Summary

A well-prepared variance report is like a trusted advisor for your business. It highlights every deviation from the company's budgets and goals‚ÄĒboth favorable and unfavorable.¬†

This guide to variance reports will explain what a variance report is and walk you through how to create one and use it to make better decisions in your business. 

‚ÄćWhat is a variance report?

A variance report is a written document, presentation, or a combination of the two, that is one of the financial statements companies use to communicate complex financial data to their board and investors. However, it doesn't just show you numbers‚ÄĒit reveals where your business struggles and shines.¬†

The main goal is to identify the percentage difference or the variance in absolute terms between what was planned or budgeted vs actual results. Companies can use variance reports as a management tool to make data-driven adjustments to their operations.  

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 dragging your operation.

Note that in the parlance of variance reporting, the terms favorable and unfavorable refer to what a variance is telling you about your business. In contrast, the terms positive and negative refer to the actual number associated with the variance.

For example, a positive variance in churn isn't a good thing because that would indicate churn was higher than expected (an unfavorable variance). In this case, a negative variance, one that indicates churn is less than expected would obviously be preferable.  

What does a variance report contain?

A typical variance report comprises several key components:

  • ‚ÄćActual 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.‚Äć
  • 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.‚Äć
  • 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. 

What types of variances should a SaaS company be looking for?

SaaS companies can focus on two different types of variance in order to better understand their business: financial and operational variances.

Financial variances include comparing your actual results with expected results planned or forecasted for individual line items. Financial variance reports are used to analyze the health of your business. Financial variance reports are important for revealing 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 cost (CAC) or monthly recurring revenue (MRR). Because most SaaS metrics are calculated from two or more financial line items, they 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 variance report results or analyzing metrics, variances will allow you to make data-based decisions. Below are some examples of common types of variance reports of interest to SaaS companies:

Income statement variances 

  • Revenue: This variance shows the difference between projected and actual sales. For example, if your SaaS company expected to earn $1 million in MRR but reached only $900,000, that's a variance to dig into.
  • Costs: You can use this variance to compare predicted expenses with what you actually spent. For example, if you budgeted $50,000 for server maintenance but ended up paying $60,000, you might want to investigate further.

Balance Sheet variances

  • Assets: Cash on hand is vital for liquidity, runway and managing your cash flow. So, if you budgeted for $200,000 in cash but find only $150,000, that's a red flag. Another example is accounts receivable. This refers to projected payments vs. actual money you received.
  • Liabilities: Accounts payable are the money you expected to owe suppliers as opposed to actual debts. Another variance can include Loans Payable. This refers to the differences between projected and actual loan balances.
  • Equity: Retained earnings are the profits you expected to keep versus what you actually managed to save. Or you can analyze shareholder's equity‚ÄĒvariances between planned and actual investments.

Variances in SaaS metrics

Both public and private SaaS companies often engage in variance analysis reports driven by compliance or investor expectations. Metrics like lifetime value to customer acquisition cost (LTV:CAC) can offer deep insights. 

For example, imagine your LTV:CAC ratio has changed from 4:1 last quarter to 3:1 this quarter. This situation is one in which you could use a variance report to gain some insights. 

You would first identify which part of the ratio has changed. If you find that CAC has risen, you would look into your marketing and sales expenses to pinpoint the specific costs that changed and adjust your strategy accordingly. 

On the other hand, if LTV has dipped, you would dive into customer behavior and figure out what's impacting their lifetime value. Perhaps more of your customers are downgrading for some reason or churning altogether. Understanding what is driving the LTV down is the first step to changing that trend. 

Here are the 4 steps to creating a variance report

1. Gather financial data 

Variance reports identify the differences between your actual figures and your budgeted or forecasted numbers. It means you'll need to collect the following:

Actual figures for revenue and expenses

Providing precise 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 for comparison

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

2. Calculate 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.

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

Graphic illustrating simplified formulas for calculating absolute variance.
Simplified formulas for calculating absolute variance.

Percent variance takes the absolute variance and expresses it as a percentage of the budgeted figure. Percent variance is particularly crucial because it puts the absolute figures into context, allowing for more nuanced interpretations and planning.

Graphic illustrating simplified formulas for calculating percent variance.
Simplified formulas for calculating percent variance.

Note that performing these calculations manually on a spreadsheet can be laborious and error-prone, especially when dealing with large sets of data or complex formulas. Also, as data evolves, recalculating variances can become a recurring headache.

Having laid out the core principles and formulas for variance reporting, let's move on to some practical examples that will illustrate these calculations in action.

Revenue variance example

In the example below, the negative 10% variance shows you there's an area that you need to pay attention to. Perhaps your sales strategies aren't effective enough, or market conditions have changed.

Graphic showing a calculation of variance in new bookings, a key revenue driver for SaaS companies.
Variance calculation for new bookings (a key revenue driver for SaaS companies).

Cost variance example

In this example, a negative 6.7% variance indicates cost savings, which is favorable. Somehow you managed to save some money on your last quarter’s hosting fees. This might be something you’d want to investigate to understand why it happened. 

Did your engineering team do something that made your cloud usage more efficient (a good thing)? Or is that variance the result of a reduction in your customers or their usage of your product (not such a good thing)? 

This is a good example of why it’s important to not only run variance reports but to also be very thorough in your variance analysis. 

Graphic showing a calculation of variance in cloud hosting costs, a significant and often highly variable line item cost for SaaS companies.
Variance calculation for cloud hosting costs, a significant and often highly variable line item cost for SaaS companies. 

‚ÄćExample of a variance calculation for a SaaS metric

Churn is a metric of particular interest for SaaS companies. It's expensive in terms of both CAC and the loss of recurring revenue, making it a key metric to monitor. But that's not all. Churn is typically reported as a percentage. So, in the example below, the percent churn is the absolute value of the variance. However, reporting churn in this way may not provide the full context.

Graphic showing a calculation of variance in churn as an absolute value.
Calculation of the absolute variance in churn for one quarter.

To really get how big this variance is, you need to calculate the variance as a percentage. When you change the expected and actual churn numbers to absolute numbers and use the formula we talked about, the magnitude of the churn issue becomes much clearer. 

Graphic showing a calculation of variance in churn as a percentage.
Calculation of the absolute variance in churn as a percentage.

A 40% higher churn rate is alarming and calls for immediate attention to customer retention strategies.

3. Conduct a variance analysis

After calculating the variances, the next step is to conduct a thorough variance analysis. This involves understanding the different types of variances in your financial report. The primary goal here 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

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.

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. Here are several tips:

  • Presenting results in a slide presentation is a common practice that pairs well with a written report.
  • Keep your report clear and concise, and while you will report on all variances, focus more attention on those that matter most to your audience.¬†
  • Use tables for numerical data and enhance comprehension with charts or graphs. For example, a bar chart can depict revenue variances clearly.
  • 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.¬†¬†

Using your variance report to drive improvements

Variance reports offer great insights that can help you improve your business, that is, if you actually use them. Here are some suggestions for how SaaS companies can to make their variance reports actionable: 

  • Identify areas that require attention, either for concern or for potential growth.¬†
  • Make data-driven decisions based on your analysis, making sure you're acting on concrete insights rather than hunches.¬†

Effective communication is essential when it comes to explaining variance, and this requires knowing your audience when sharing findings. For example, internal teams might need granular details for operational tweaks, but when reporting to the board or investors, focus on what they care about, which is typically revenue and cash. 

‚ÄúAt the end of the day, company leaders, boards, and investors care about three big things: Are my costs low? Is my revenue growing? And, is my cash stable?‚ÄĚ

Present all data but emphasize major variances in revenue, costs, and other key metrics relevant to your SaaS business at that time. This targeted approach ensures you're not just collecting data but using it to make more impactful business decisions.

Best practices for variance reporting in SaaS businesses

There are a number of best practices that you can adopt with variance reporting to make it a more effective tool for data-driven decision making. However, they don't make variance reporting any less time-consuming. 

While calculating variance is pretty straightforward, gathering the data you need from different business systems, ensuring its accuracy is a very manual process if you're still using spreadsheets for your financial planning and analysis (FP&A).

To the extent that your variance report contains line items and/or metric that have multiple potential drivers, the variance analysis -- drilling down into each driver and trying to understand how they are collectively impacting the line item or metric can be highly complex. 

Using a modern, purpose-built FP&A software, like Drivetrain, can eliminate a lot (if not all) of the friction associated with creating variance reports. Drivetrain 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.

The best practices described below apply to all variance reporting, regardless of the software you use to create your reports. Using a modern FP&A tool just makes implementing them a whole lot easier and faster. 

Regular and consistent reporting schedule

Effective variance reporting requires regularity. While public SaaS companies often 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. 

Use of automation tools to streamline the process

Streamlining the process through automation can eliminate most issues involved in manual reporting. This is where Drivetrain shines. Its features can replace cumbersome spreadsheets and manual calculations, making the process faster, more efficient, and more reliable.

Collaboration between finance and other departments

Interdepartmental collaboration is crucial for accurate variance analysis and for implementing subsequent changes. Drivetrain makes the process simple thanks to its in-app communications features. Sharing information across different teams within the platform is seamless and much faster than navigating numerous email chains.

Continuous monitoring and evaluation of variances

If you monitor your metrics continuously, you can quickly uncover issues and seize opportunities. With Drivetrain, this proactive approach is possible.

The variance report is a key part of your company's financial governance, and mastering it can help you ensure you stay on track toward your strategic goals.

A robust FP&A platform like Drivetrain makes this possible, serving as the foundation for developing accurate variance reports and aiding in their interpretation. Drivetrain can significantly simplify variance reporting, making it easier to find the insights hidden in your data -- insights you can use to run your business better. Contact us for a demo, and we'll show you how!

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