Variance is the frequently-forgotten other half of budgeting. Many businesses, especially the small, entrepreneurial kind, ignore or forget the other half of the budgeting. Budgets are too often proposed, discussed, accepted, and forgotten. Variance analysis looks after-the-fact at what caused a difference between plan vs. actual. Good management looks at what that difference means to the business.
Variance analysis ranges from simple and straightforward to sophisticated and complex. Some cost-accounting systems separate variances into many types and categories. Sometimes a single result can be broken down into many different variances, both positive and negative.
The most sophisticated systems separate unit and price factors on materials, hours worked, cost-per-hour on direct labor, and fixed and variable overhead variances. Though difficult, this kind of analysis can be invaluable in a complex business.
Look for Specifics
This presentation of variances shows how important good analysis is. In theory, the positive variances are good news because they mean spending less than budgeted. The negative variance means spending more than the budget.
Variance Analysis for Sample Web Plan
First and for convenience sake we reproduce the original web expense budget shown previously:
Sample from Web Strategy Pro.
Then we can look at the first three months of the plan in implementation, actual results, in the following:
Sample from Web Strategy Pro.
And then the variance analysis, which compares plan to actual:
Sample from Web Strategy Pro.
As you compare these results, notice that sales were higher than planned, cost of sales were of course also higher than planned, so the gross margin was higher than planned. We saw that in the previous topic, analyzing the sales variance.
There are some relatively large variances in the expenses. These need care and proper analysis. The numbers alone don't tell management enough without some additional questions. For example:
- Compare the negative variance in website development to the positive variance in website infrastructure. The two amounts seem to balance each other out. Management should ask whether this might be an accounting problem (website infrastructure expenses being accounted for as development expenses by mistake) rather than a real variance.
- On that same point, if there isn't a simple accounting problem, variances as large as those shown in this example are often indications of unrealistic budgets, misapplied tactics, or other problems. They should be discussed.
- Also on the same items, a positive variance in website infrastructure may not necessarily be a good thing. As explained above, it might be a simple accounting problem. If it isn't that, though, is spending less than planned always good? What if the website team spent less because it implemented less, objectives weren't met, or projects fell behind schedule? Even positive variance needs some attention, to make sure the whole business is running correctly.
- The variance on expensed equipment looks like a simple matter of timing. The negative variances add up to the same amount as the positive variance. That indicates that the planned amount was spent, but just in different months than originally planned.
Summary
Variance, plan-vs.-actual analysis, is critical to implementation. Getting the numbers is the first step, but then comes understanding them.
