As SaaS businesses continue to realize the full value of their data, new technologies have emerged that are changing the FP&A function into a more strategic role, one that has finance leaders looking for new ways to simplify variance reporting (among their many other tasks) and leverage their data to make better decisions.
Your tech stack may be a limiting factor
Variance reporting identifies the difference between budgeted and actual expenses, both in terms of the actual amount (actual performance) and the percentage difference (the variance percentage). While they are typically considered just one of a number of routine financial reports that finance teams create, variance analysis reports are most powerful when used as a management tool.
The most effective variance report will help companies make better decisions that foster growth. This is possible because different types of variance can reveal actionable insights. For example, when you compare your actual results against unfavorable variances can be used to identify areas of your business that need improvement, while favorable variances can reveal new opportunities you may be able to leverage.
Depending on the technologies they're using, drilling down into all the different data sources you need to surface those insights can be very time consuming and daunting for many businesses, especially if they’re still relying on spreadsheets for their financial planning and analysis (FP&A).
In this article, we’ll look at the most common tools that SaaS finance teams businesses are using for variance reporting. We'll also explore how FP&A technology can take variance reporting to the next level, allowing SaaS companies to leverage the powerful insights it provides for better predictability and growth.
A comparison of the tools and technology SaaS businesses use to create variance reports
Most FP&A technologies now on the market make data aggregation from various source systems easier, which significantly reduces the work associated with variance reporting.
Some tools also offer powerful automation features that can be used to generate variance analysis reports faster and reduce the risk of errors associated with manual report generation.
Integrating software solutions allows FP&A teams to focus more time on their analysis instead of compiling and checking their data. By leveraging technology in this way, teams can get their actual results and compare them to projections more quickly and when they find a large discrepancy that needs attention, start proactively working to mitigate it by controlling future costs.
While technology can be a game-changer, not all technologies are created equal. Here, we’ll take a look at the most common types of software SaaS companies are using to support their FP&A activities and how well they serve the purposes of variance reporting specifically.
Conducting a variance analysis in spreadsheets is deceptively simple. Although it may be tempting to chuck your data into a template, you’ll probably find that it takes a lot more time than you expect to compare your company's actual performance against the budget or forecast.
First of all, you have to query and download the data you need from different business systems, making sure the actual numbers in your income statement and for your cash flow are current.
Aggregating the data is a manual process, which can lead to inadvertent deletions, mistyped equations, and inaccurate cell references. So, you’ll spend yet more time making sure the data is not only current but correct and that every change in one spreadsheet or data set has been carried through all the others needed for your analysis.
Once you get your data to a place where you can trust it, actually doing the variance analysis to find where variances are occurring is simply a matter of comparing your actuals with your projected or forecast values and calculating the increase or decrease in each line item and the percentage variance.
The tough part is all the work required to understand the internal and external factors driving expense variances, which is where the actual insights are hiding.
To find the actionable insight, you need to do a root-cause analysis to understand what’s driving the variance. This type of analysis requires drilling down into your data.
This is hard to do in a spreadsheet because the data you need to get a full picture of what’s going on is often spread across multiple systems and spreadsheets.
Aside from the enormous amount of time it takes to prepare your data for analysis, once you prepare your variance analysis report, there’s no simple way to include the insights gained in your forecasts because the level of detail may differ between departments contributing to the data needed.
Another potentially very costly problem is that given the time it took to generate those insights, they may well be already outdated. Any decisions made on such results may not achieve the intended effects.
Automation and integration tools
There are a number of automation and integration tools designed for various types of financial analysis and reporting activities like variance reporting.
Such systems connect to and automate data downloads from your accounting and other business systems, eliminating all the work and error associated with manual data aggregation. With these systems, variance is calculated automatically. So they can deliver results faster, allowing for real-time or near-real-time examination.
Most of these tools are limited to variance analysis and notification of variance. While some may also automate the development of the actual variance report they cannot explain the underlying reasons for the variance. This requires a root cause analysis, which automation and integration tools are not equipped to provide.
Further, automation and integration tools do not offer the ability to analyze variance in SaaS metrics, which is another important way to use variance reporting to improve your business.
Given these limitations, such tools are an incomplete solution for fully leveraging the power of variance reporting in your business.
Data visualization tools
Data visualization tools allow you to create visual representations that improve data comprehension that make understanding variance easier for stakeholders. However, they fall short when trying to determine the underlying causes that would help you minimize the negative impact of variances on your business.
Unlike the other solutions we’ve described here, BI tools are quite well-suited to variance analysis reporting.
Their primary limitation in this context is that they typically require support from IT teams to work with them, both in terms of integrating with the source systems that contain the data you need and actually getting the data in the form you need it.
Depending on the complexity in your business and the number of source systems you’re working with, having to go through an IT team to get the data you need can add significant time to your variance reporting process. However, when you receive the data, it will have far fewer data quality issues than you’ll have with spreadsheets.
Most BI platforms include visualization tools, allowing your IT to build interactive dashboards that aggregate data from all your source systems and track deviations in real time.
Unlike integration and automation tools, BI platforms offer a more complete solution because they are not only able to identify the variances in your business, they can also help you determine the underlying issues driving them. Thus, they can uncover actionable insights you can use in your business.
However, BI technologies cannot "speak the language" of business finance. They do not have the ability to comprehend or model the reasoning required for planning and forecasting. This means that while they can uncover key insights, they cannot help you figure out how to best leverage them to improve your business.
This is just one of the ways that a purpose-built FP&A platform like Drivetrain can take your budget variance reporting to the next level, not only unlocking the insights, but also giving you the modeling and forecasting capabilities you need to put those insights to work in your business.
How a modern FP&A platform can transform your variance reporting process
Cobbling together a tech stack from several different tools to provide all the capabilities needed for modern FP&A is difficult and expensive.
With the availability of technologies that are purpose-built for strategic finance, this begs the question: Why would a SaaS company continue to use technologies that impose far more work than would otherwise be necessary or incomplete solutions that don’t allow them to fully leverage their data?
An FP&A platform built for strategic finance can help finance teams take their variance analysis reports in a fraction of the time. Let’s take a closer look now at how.
Seamless data integration
When interpreting variance report results, you must look at data from diverse sources and integrate it to ensure consistency and compatibility.
With Drivetrain, you can break down silos by linking your ERP/GL data with other business systems like CRM and HRIS on demand or on a predefined schedule.
Drivetrain can integrate with virtually any of the business data systems your company uses, which makes calculating all sorts of SaaS metrics easy. This makes it possible to further compare actual vs. predicted performance in core SaaS metrics, such as your LTV:CAC ratio, net revenue retention (NRR), and the Rule of 40 to reveal insights into changes in your operational efficiency.
Root cause analysis to identify the drivers of variance in your business
Understanding the drivers behind variance is a key component of variance reporting. Your board and investors will expect you to be able to explain the variances you find, especially any variances that can have a significant impact on your business.
More importantly, you need to understand the underlying drivers of variance in order to fully leverage them to improve your business.
For example, if you understand what’s behind a positive variance, you can double-down on the activities that are driving it. Similarly, knowing the reasons for a negative variance can indicate areas in your business that need improvement.
Predictive analytics and scenario planning to leverage the insights in your variance reports
In that case, Drivetrain can help put you through different scenarios to help future-proof your SaaS business across different timeframes.
Even when you understand the drivers of variance in your business, knowing what to do in response is not always a simple matter as there may be multiple drivers, some of which may have offsetting effects.
Drivetrain gives you the ability to seamlessly connect the myriad interrelated and complex metrics that FP&A processes require. In the context of variance reporting, this allows you to test different ideas about how to address a given variance with predictive analytics and scenario analysis.
Ability to do ad-hoc variance analysis
Finance teams often need to run an ad hoc variance analysis to address a specific question or provide information for key business decisions, for example, how to respond to changing market conditions. If they’re using spreadsheets it may take too long to get results, and rushing the analysis can lead to inaccuracies.
In contrast, Drivetrain continuously aggregates data for you in real time, which means you always have the data you need at your fingertips.
Ability to develop highly accurate, strategic budgets
Generally speaking, the more precise your budget, the less variance you’re going to find in your variance analysis reporting.
SaaS finance leaders work hard to create accurate budgets each year, but for many, predictability in their business remains an elusive goal. Simply put, it’s hard to get it right in such a dynamic market as SaaS.
Strategic budgeting can help because it not only aligns with your company’s strategic goals but also gives you a great deal of flexibility to respond more quickly than a traditional, incremental budget does.
Drivetrain supports all strategic budgeting methods, including zero based budgeting, activity based budgeting, driver based budgeting, and value proposition budgeting. The key benefit that a technology like Drivetrain provides is that, regardless of which method you choose, you can make your budget a rolling budget.
Rolling budgets offer the kind of flexibility that SaaS businesses sorely need, but they're tough to implement with spreadsheets. Manual work is again the culprit here. The time required for data aggregation and review necessary in order to to update the budget on a monthly basis is enormous.
With automated data aggregation and real-time updates in Drivetrain, you can easily implement a rolling budget, which means you’ll see fluctuations in your actual expenses that can lead to variance sooner.
FP&A technology is the shortest path to faster growth in SaaS
The ability to make business decisions quickly has become table stakes for SaaS finance leaders now, given the increasingly strategic role they’re serving in their companies today.
Technology is a key differentiator in almost every industry today, especially in SaaS. Flexibility and speed are critical. With a feature-rich FP&A platform like Drivetrain, tailor-made for SaaS, you can unlock game-changing insights in variance reporting and other core finance functions in a fraction it would take with other types of technology.
Every SaaS company today is competing in a mercurial market where those that can pivot respond quickly to problems and opportunities based on data-driven insights will grow faster than those that can’t. If you want to accelerate your company’s growth, it’s time to start exploring what FP&A technology has to offer.
Contact our team for a demo to start driving your business forward faster.