50 Business Challenges: No. 22 Variance Analysis

As a business coach, I am often surprised that small companies do not use variance analysis as a means of managing the firm. What is it? In effect it compares actual to projected figures in order, seeks an explanation for any differences, and considers the consequences.

Variance analysis can (and should) be applied to both income and expenditure, preferably monthly. It can be used at whatever level your figures are produced to.

Income

Are you above or below budget? If above, is this merely business expected later in the year which has been brought forward? If so will you  have a gap in income in the future? A particular product or service (or a person) may not be delivering the expected income. The reason may be seasonal, a change in the market or several others. The response may in some circumstances be additional promotion, or a sale to liquidate unwanted stock.

Expenditure

Similar principles apply. Differences may be explained by timing, market factors or even the weather. What are the knock on effects on your business, do you need to do something as a result, and if so what and when?

 

Of course, this analysis is not relevant only month by month, but cumulatively over the course of the year. This takes account of the timing differences outlined above. Thus it is worth doing a variance analysis on the basis both of the current month and for the year to date.

 

How would it feel to have a better handle on what is going on in your business? You challenge is to start using variance analysis from the end of this current month.

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