Budget Variance Commentary

Monthly Budget Variance Analysis (BVA) is a core function every FP&A department performs. So, why does monthly variance commentary often leave much to be desired? Usually, the commentary is either superficial and not helpful for the business or delivered so far after the month has ended that it is no longer useful to the business. To remedy these common issues, FP&A departments should spend more time Implementing a robust-holistic BVA process.

Learn who the key decision-makers and stakeholders are in each department you support and understand how they like to operate and what support they need from you. Spend time building strong relationships with your key business stakeholders. Not only will they help you learn the business, they will often serve as a resource when you are trying to understand what caused the variance to the budget.

Having predefined thresholds for when to comment on month-end variances will save time. The thresholds will vary by company, P&L line, and department. The key is to establish a threshold that covers the material variances and ignores the immaterial variances that have a minimal impact on the overall results.

I once worked for a global multi-national company and the variance threshold for many line items was at 100,000 or even 200,000 before we started to spend time researching them. On the flip side, at a smaller company that I worked at we often researched variances as low as $5-10,000. The key to making this work is to establish a threshold at the beginning of the year with the business and then stick to it. It may be tempting to understand every little variance, however your commentary will suffer if you do so.

When presenting your BVA analysis avoid showing the business a GL-focused income statement and focus on presenting the analysis in a way that makes sense to the business leader. Take compensation expenses as an example. Many companies will have multiple GL accounts for every component of compensation (salary, holiday pay, vacation, ss benefits, medicare benefits, etc. ) and this might be helpful for finance to understand compensation but not the business. The business might want to see it all together in one line as salary or potentially broken down between salary, benefits, and variable pay depending on the department. The key is to understand what view makes the most sense to your stakeholders and to present the analysis to them in that format.

Breaking your variance analysis down into key classifications will make it easier for the business to understand which type of variance they are looking at and if it is something they can control. The categories you break these expenses into will vary by business, but in general they should be broken down into some combination of controllable and uncontrollable expenses.

• Budget/Data Errors are variances that are caused due to human error.
  

• Accounting Adjustments/Errors are variances tied to bookkeeping and again are not related to business performance.
• Corporate Allocations are lines that the business has no control over as the expenses are allocated by corporate.

Controllable expenses are the most important category as these are expenses within the business leader's control. This is where most time should be spent. When conducting BVA analysis you should spend 80% of your time focusing on this category.

When conducting your monthly variance analysis using an established process will help ensure that you provide meaningful commentary focused on material controllable variances. One framework that works well for budget variance commentary is Cause/Impact/Action.

1. Root Cause Analysis - When you have found a material variance you must first determine the root cause of the variance.
   
2. Impact - Next, quantify the impact. This involves not only understanding the impact to the current month; also if no changes are made, what the go-forward impact to the business is for both favorable and unfavorable budget variances.
3. Action - The final part of any analysis should include an action for the business. This helps separate average variance commentary from best-in-class variance commentary as the business is looking to us for advice based on our analysis.

Many FP&A professionals forget about variance analysis as soon as the month is over and they move onto their next task. This is a mistake! Taking time to track key variances and the actions implemented each month and then reporting back to the business on the progress made toward the key actions goes a long way toward building credibility with the business.

One of the main reasons variance commentary takes so long is because the entire process is still manual for many companies. This means someone has to research each variance. Much of the BVA analysis can be automated today with FP&A automation tools. These tools can help automate by doing these steps:

• Build reports identifying miscoded account entries on a weekly basis. This prevents commentary from being littered with explanations driven by accounting mistakes.
  
• Provide the ability to compare budget, prior year, and actuals at a vendor level. This helps to quickly and easily identify key vendor variances.
  
• Provide an easy comparison of headcount budget vs actuals. This helps explain variances in compensation and other employee-driven costs.

Automating these steps is crucial to freeing your team's time to focus on the value-added parts of BVA analysis.

Variance commentary will continue to be a key activity for all FP&A departments and a way for good FP&A departments to separate themselves from best-in-class FP&A. If you feel like your variance commentary is lacking, analyze your variance analysis against the eight-step process in this article and decide how you can improve your variance commentary.

1. Research before you start
   
2. Know your audience
   
3. Establish your thresholds
   
4. Ditch the income statement view
   
5. Focus on Controllable Expenses
   
6. Use Cause/Impact/Action in commentary
   
7. Track progress
   
8. Leverage automation

After analyzing your process if you find that you are lacking automation in your variance commentary then consider adding an BVA automation tool to the process. This step is important as it helps free up time to focus on the other more important steps in the process. Without proper automation it becomes difficult to achieve best-in-class FP&A BVA analysis. Tools like Cobbler can help automate the BVA process and give finance an easy drag-and-drop experience to create BVAs that are more meaningful to the organization.


For more information about how Cobbler can help automate budget variance analysis, contact hello@cobbler.io or book a demo.