Track Against Actuals
Reading a variance is mostly about reading two of them at once.
A cost above budget means nothing until you know whether the revenue it supports was above budget too.
Reading variances
| Account type | Actual above budget | Actual below budget |
|---|---|---|
| Income | Favourable | Adverse |
| Expense | Adverse | Favourable |
| Cost of goods sold | Adverse, unless sales rose too | Favourable, unless sales fell |
That last row is the one worth pausing on. Cost of goods rising alongside higher sales is not a problem; it is the point. Always read a cost variance next to the revenue variance rather than on its own.
Timing against real
Half of all monthly variances are timing: an invoice dated a day into the next month, an annual bill that arrived early, a campaign that slipped. Look at the year-to-date column beside the month before you go and ask anybody about it.
- Month adverse, year-to-date on plantiming
- Something landed early or late. Nothing to act on beyond noting why.
- Month adverse, year-to-date adversereal
- The pattern is persistent. This is the one worth a conversation.
- Month on plan, year-to-date adversehistoric
- Something went wrong earlier and has since been fixed, or has not been.
Keeping it useful
- Review monthly, shortly after the period closes, while anyone can still remember why.
- Investigate large variances in both directions. An unexpectedly small cost is as informative as a large one.
- Reforecast rather than rewriting history when circumstances change materially.
- Keep the original budget. Comparing against a figure that has been quietly edited all year proves nothing.