Dec 13, 2022

Analyzing Variance in financial reporting

Tracking and understanding variance is a key component to a strong financial reporting process

Analyzing Variance in financial reporting

When building financial reports it’s important to understand not just the overall health of the business when looking at top-line metrics such as revenue and expenses but also how individual line items are trending. This is especially important for our income statement where monthly fluctuations can be more variable.

Analyzing specific financial metrics can be difficult but doing trend analysis is an important step to understanding your business performance.

One easy way is to track monthly fluctuations by setting up a month of over month column in your report to show the percentage change from one month to another. Once you have this setup, you can set up conditional formatting to highlight any changes +/- 5%. A typical range to identify variance worth looking into is anywhere from 5% to 20% variance given the size of your organization and the predictability of your business. You can see this in the video below.

What to look for:

Variable expenses or COGS that can change dramatically from month to month. Examples could include - software spending, travel, marketing, inventory, or raw materials.

Expenses like these can fluctuate in large amounts and can be the difference between a profitable month and one in the red. Each business and industry will have specific expenses that give the best picture of the financial health of the business and help you keep track of any trends that may be starting to develop.

When looking to identify which metrics are important to your business, print out the last 12-month income statement and start from there. Go through each revenue and expense item to find which had the largest changes between months.

Some changes are predictable, for example, if you have a quarterly expense. For ones where there is no known variability make a note to highlight and check each period.

As an example let’s say you spend $500 a month on marketing. But you look at this month's number and see it's $1500. First, you want to understand why it went up so much. By looking at the transactions maybe you see that you invested more heavily into promoting an influencer. Then you can compare and see if this change had any impact on your revenue for that period and make a note to see if it has any impact going forward. The key isn’t just to find changes in your numbers, it is to understand what is driving them.

Fortunately, you can use Genius Sheets to quickly analyze the reason for any variance in your reports! By right-clicking on any cells that have a formula, you can generate a transaction report for specific line items.

This functionality lets you quickly see the underlying transactions and compare what is new or changed from other months.

It’s important to remember variance itself is not a bad thing! As long as you know WHY you can prepare and react accordingly.

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