Variance Reporting - definition & overview

Variance reporting is a fundamental tool in the world of small businesses. It's a method of financial analysis that allows business owners to understand the difference between planned and actual performance. This technique is used to monitor and control business operations, identify trends, and make informed decisions.

As a small business owner, understanding variance reporting can be the key to unlocking your business's potential. It can help you identify areas where your business is underperforming or overperforming, allowing you to make strategic decisions to improve your bottom line. This article will delve into the intricacies of variance reporting, breaking down its components and explaining how it can be utilised effectively in a small business context.

Understanding Variance

Variance, in the context of business, is the difference between what was expected and what actually occurred. It's a measure of deviation from the plan. If the actual results are better than expected, it's called a favourable variance. Conversely, if the actual results are worse than expected, it's called an unfavourable variance.

Understanding variance is crucial for small businesses because it allows them to identify areas of inefficiency and take corrective action. For example, if a business's actual sales are lower than expected, it may indicate a problem with the sales strategy, pricing, or product quality. By identifying this variance, the business can take steps to address the issue and improve future performance.

Types of Variance

There are several types of variance that a small business might encounter. These include sales variance, cost variance, and budget variance. Each of these variances provides different insights into the business's performance and can be used to inform strategic decisions.

Sales variance is the difference between actual sales and expected sales. It can be caused by factors such as changes in market conditions, competition, or customer behaviour. Cost variance is the difference between actual costs and expected costs. It can be caused by factors such as changes in supplier prices, production inefficiencies, or unexpected expenses. Budget variance is the difference between the actual budget and the planned budget. It can be caused by factors such as changes in revenue or costs, unexpected expenses, or changes in business strategy.

Calculating Variance

Calculating variance involves comparing actual results with expected results. The formula for calculating variance is: Variance = Actual Results - Expected Results. The result can be a positive number (indicating a favourable variance) or a negative number (indicating an unfavourable variance).

For example, if a business expected to sell 100 units of a product but only sold 80 units, the sales variance would be -20 units. This is an unfavourable variance, indicating that the business sold fewer units than expected. Conversely, if the business expected to incur �$1000 in costs but only incurred �$800, the cost variance would be �$200. This is a favourable variance, indicating that the business incurred fewer costs than expected.

Variance Reporting

Variance reporting is the process of documenting and analysing variances. It involves comparing actual results with expected results, identifying the causes of variances, and taking corrective action if necessary. Variance reporting is a key component of financial analysis and is used to monitor and control business operations.

For small businesses, variance reporting can provide valuable insights into business performance. It can help identify areas where the business is underperforming or overperforming, allowing the business owner to make strategic decisions to improve the bottom line. Variance reporting can also help identify trends and patterns, providing a deeper understanding of the business's operations and market conditions.

Components of a Variance Report

A variance report typically includes several key components. These include the actual results, the expected results, the variance (the difference between the actual and expected results), and the percentage variance (the variance expressed as a percentage of the expected results).

The report may also include a commentary or analysis section, where the causes of the variances are discussed and any necessary corrective actions are outlined. This section is crucial for understanding the implications of the variances and for informing strategic decisions.

Creating a Variance Report

Creating a variance report involves several steps. First, the actual results must be gathered and documented. This might involve collecting sales data, cost data, or other relevant information. Next, the expected results must be determined. This might involve referring to a budget, a forecast, or a previous period's results.

Once the actual and expected results have been determined, the variance can be calculated by subtracting the expected results from the actual results. The percentage variance can then be calculated by dividing the variance by the expected results and multiplying by 100. Finally, the causes of the variances should be identified and discussed, and any necessary corrective actions should be outlined.

Benefits of Variance Reporting

Variance reporting offers several benefits for small businesses. First and foremost, it provides a method for monitoring and controlling business operations. By comparing actual results with expected results, business owners can identify areas of inefficiency and take corrective action.

Second, variance reporting can help inform strategic decisions. By identifying areas where the business is underperforming or overperforming, business owners can make decisions to improve the bottom line. For example, if a business's actual sales are lower than expected, the business owner might decide to revise the sales strategy, adjust pricing, or improve product quality.

Identifying Trends and Patterns

Variance reporting can also help identify trends and patterns. For example, if a business consistently has a favourable sales variance, it might indicate that the business's sales forecasts are too conservative. Conversely, if a business consistently has an unfavourable cost variance, it might indicate that the business's cost estimates are too optimistic.

By identifying these trends and patterns, business owners can adjust their expectations and improve their planning and forecasting processes. This can lead to more accurate budgets and forecasts, which can in turn improve business performance.

Improving Accountability

Finally, variance reporting can improve accountability within a small business. By documenting and analysing variances, business owners can hold themselves and their teams accountable for business performance. This can foster a culture of responsibility and continuous improvement, which can ultimately lead to better business results.

In conclusion, variance reporting is a powerful tool for small businesses. By understanding and utilising variance reporting, small business owners can monitor and control their operations, make informed strategic decisions, identify trends and patterns, and foster a culture of accountability. So, embrace the power of variance reporting and unlock your business's potential!