On the surface, variance analysis reporting is pretty straightforward. Many organizations perform variance analysis simply as a financial reporting exercise, to identify the difference between projected vs actual performance for key financial indicators in the budget.
But the real value of a variance analysis report is in the insights it can provide. Variance analysis reports reveal how the business is truly measuring up and shed light on issues that may otherwise go unnoticed.
This is key to unlocking opportunities to refine strategies, make more informed decisions, and optimize for growth. It’s a little like detective work, spotting problems hiding in plain sight.
Our mission here? It’s to take a dive deep into variance reporting to reveal those hidden inefficiencies in your operations. With this guide, you'll quickly discover areas ripe for improvement and propel your company to new heights.
How to create a variance analysis report
Doing a variance analysis is a required part of creating a variance analysis report and can take a fair amount of time. However, it’s worth the time spent because your unfavorable variances can reveal inefficiencies hiding in your operations. We recently published a detailed, step-by-step guide to help you master variance reporting. As a quick refresher, we’ll summarize that process here:
- Gather and analyze data: Gather all your relevant data. You’ll need both actual figures for revenue and expenses and budgeted or forecasted figures for comparison. Make sure it's accurate, comprehensive, and from a range of sources.
- Calculate the variances: 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.
- Investigate the variances: In this step, the goal is to uncover the reasons for every variance you find. In order to glean the deepest insights here, 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? You need to be able to explain the variance in order to gain the insights it can provide.
- Create a variance 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.
Key types of variance that can help you root out hidden issues
Finance teams diving into a variance analysis is not unlike a doctor studying the vitals of a patient to decipher what's going on beneath the surface. Just like a persistent cough might mean more than a simple cold, certain variances hint at deeper operational issues. Here's how you can discover what may be hiding behind the numbers:
These kinds of variances point to differences between projected and actual revenue.
- What they reveal: If you notice unexpected revenue dips, it might hint at understaffed sales departments, leading to missed opportunities. On the other hand, if the variance report shows an uptick in revenue that is not proportional to the increase in sales staff, it could indicate inefficiencies like overstaffing.
These are budget variances, which highlight the differences between budgeted and actual costs.
- What they reveal: A closer look at the cost variances can expose inefficiencies, such as the ineffective utilization of resources. If your expenditures are escalating without a corresponding rise in output or quality, there might be wastage or misuse of tools and assets.
Variances in customer acquisition and retention metrics
These kinds of variance capture any differences in expected vs. actual numbers of new customers acquired and retained.
- What they reveal: Variances in customer retention can flag issues like poor onboarding processes. A spike in customer acquisition cost without a subsequent increase in customer retention signals a leaky bucket where you're onboarding clients, but they're churning out too soon.
User engagement and satisfaction variances
This type of variance indicates changes in how actively users interact with your software and their satisfaction levels.
- What they reveal: Declining user engagement or satisfaction scores can point toward problems like slow customer support response times or general customer support inefficiencies. If users aren't engaging as expected or express dissatisfaction, they might encounter challenges that aren't promptly addressed.
Interpreting variance report results is essential to truly understand the narrative behind the numbers. As you begin to understand what is driving these variances, you can start piecing together a more comprehensive picture of your operations.
Making your variance reports actionable
With your variance report in hand, you can start thinking strategically to determine what steps are needed to reduce the variances you found. These might involve reallocating resources, revising strategies, or initiating new projects.
You also need to figure out a timeline over which you’ll implement the actions you determine are necessary. Some variances are more important to the business than others and thus require immediate attention while others can be addressed over time.
Outline the expected outcomes of these actions you plan to take, not only in terms of reducing future variance, but also the impacts on your business. You can use this information in your financial planning to help you set new benchmarks and align future strategies.
By systematically following these steps, you identify areas of concern and chart a course for continual improvement, ensuring your organization remains agile and efficient.
Best practices for using variance analysis reports to drive improvement
Variance reporting isn't just a tool but a compass pointing toward business optimization. However, like any tool, its efficiency depends on how well you wield it. Here's a guide on making the most of your variance analysis:
- Regularly review and update performance measures: A static benchmark will soon lose relevance in a dynamic business environment. By periodically reassessing and fine-tuning performance measures, you ensure your variance results remain pertinent and actionable.
- Collaborate with different teams and departments: The beauty of a variance analysis report is its objective nature. When you're armed with data-backed insights, the recommended changes aren't personal opinions but fact-driven strategies. This makes it easier for teams to align, knowing the suggestions stem from an objective analysis.
- Use data visualization techniques for better understanding: Often, a visual representation can communicate what pages of numbers can't. Tools like Drivetrain can transform raw data into intuitive graphs, charts, and visuals. This makes the variance report definition clearer but also simplifies the process of interpreting and acting upon insights.
- Monitor and track progress after implementing improvements: Implementation is just the beginning. Monitoring post-implementation is crucial to understand the real impact of the changes and ensure continuous improvement. Purpose-built FP&A software can be invaluable here, offering dynamic tracking capabilities to assess the effectiveness of changes and tweak strategies accordingly.
Variance analysis is like having a map of the vast and complex world of SaaS, with insights that can guide you straight to the land of efficiency, resource optimization, and, yes, those happy customers we all crave.
However, when you're analyzing variance, drilling into all the different data sources you need to surface those insights can be very time consuming and daunting for many businesses.
If you want to lead your company to excellence, you must pave the way with consistent reflection and data-driven action. And that's what variance analysis offers—a beacon, shining light on both your milestones and those occasional stumbling blocks.
Using a strategic finance platform like Drivetrain can be a game-changer, helping you quickly gain a clear picture of what is driving variance in your business without all the endless spreadsheets and manual calculations. If you’d like to see first hand how easy it can be to uncover the hidden inefficiencies in your business with variance analysis reporting, contact us for a demo. We’ll show you how your data can guide you to SaaS success.