In the fast-paced world of business, understanding the reasons behind changes in financial data is crucial for making informed decisions. That's where variance analysis comes in. Also known as flux analysis, this powerful tool compares two sets of data, revealing the quantitative difference between them and shedding light on the underlying factors behind the change.
Whether it's comparing budgeted figures with actual results or analyzing current year performance against the previous year, variance analysis provides valuable insights. While it may be tempting to overlook this process due to its time-consuming nature, business leaders should recognize its importance and make it a regular practice. Let's delve deeper into variance analysis, exploring how it works and why it should never be neglected.
What Is Variance Analysis?
Variance analysis serves as a vital tool for businesses to understand and explain changes in financial data. It involves comparing two points of data, typically current actual results against a benchmark such as a budget or prior period. The ultimate goal of variance analysis is to provide a comprehensive explanation of the degree of change, utilizing both numerical and descriptive elements.
By analyzing these variances, business leaders gain valuable insights into the performance of their company, allowing them to make informed decisions and potentially implement operational adjustments. This practice is essential for building flexible budgeting processes and shaping the future direction of the business.
Moreover, variance analysis plays a crucial role in detecting accounting errors, omissions, and potentially fraudulent activities. By closely examining fluctuations in financial data, it acts as a detective control mechanism, similar to account reconciliations.
Auditors often incorporate variance analysis as a "reasonableness test" at the beginning and end of an audit, ensuring the identification of any irregularities. In this context, the desired variance analysis would compare current actual financials with previously audited financials from a prior period.
In summary, variance analysis is a powerful tool that not only provides quantitative and qualitative explanations for financial differences but also supports effective decision-making and serves as a safeguard against financial irregularities.
Variance (Flux) Analysis Explained
Variance analysis is a powerful tool that is typically conducted after a financial close to compare actual results with a chosen benchmark, such as the budget. It can be applied to various levels of financial information, from overall financial statements to specific general ledger accounts. For instance, variance analysis can be utilized to assess the total revenue line on an income statement, comparing current actuals to budgeted levels.
Alternatively, it can be employed to analyze a specific revenue account, providing insights into the changes affecting a particular product, including factors like sales volume, pricing, and even return rates. Generally, variance analysis covers all three major financial statements, including the balance sheet, income statement, and cash flow statement. It can be focused on different components within these statements, such as assets, liabilities, revenue, sales, and cash flow.
Common Types of Variances
Revenue: These variances pertain to changes in sales compared to previous periods or anticipated levels. It is crucial to comprehend the reasons behind revenue being either higher or lower than in previous periods, budgets, and forecasts.
Expense: Cost changes should be carefully analyzed in relation to other fluctuations. Increases in costs are not always negative, and decreases are not always positive. For instance, the cost of goods sold can be lower due to lower material costs or a decrease in the number of products sold.
Labor: When it comes to labor costs, this particular expense variance is focused on the payroll, covering various types of workers such as hourly, salaried, and contract employees. A decrease in labor costs is seen as a positive variance, while an increase is generally considered negative. It's crucial to delve into the underlying causes of these changes in order to accurately assess their impact.
Material: This expense variance focuses on material costs for production, including direct materials like timber and indirect costs like gloves and transportation. A lower cost is a positive variance, while higher costs are negative. Understanding the underlying factors is crucial for a thorough understanding of the impact.
Overhead: Overhead includes indirect expenses beyond direct production costs, such as utilities, staff salaries, legal fees, and interest expenses. An overhead variance focuses on the difference between actual overhead costs and the comparison point. A positive variance occurs when actual costs are lower, while a negative variance occurs when they are higher.
Stronger & Faster Variance Analysis with NetSuite
Cutting-edge financial software solutions like NetSuite Planning and Budgeting offer a game-changing advantage when it comes to preparing accurate variance analyses efficiently and effortlessly. By seamlessly integrating with NetSuite Enterprise Resource Planning (ERP), NetSuite Planning and Budgeting provides access to real-time, top-notch financial and operational data.
This unified data repository empowers users to analyze data across multiple levels, making the process of investigating variances faster and more streamlined. Plus, with NetSuite's flexible reporting capabilities, users can easily make changes to parameters like an account range, period, or benchmark without having to start from scratch each time. This feature alone can save valuable time and effort, allowing business leaders to focus on making impactful decisions based on the insights gained from variance analysis.
Cutting-edge software solutions streamline variance analysis, reducing the time and resources needed to obtain valuable insights, and enabling efficient decision-making. Reach out to AccountingDepartment.com today to learn more about how our client accounting services, paired with NetSuite software, can help you and your business.
