What is a Variance Report? [2024 SaaS]

In the fast-moving world of SaaS, it's essential to quickly recognise when things are going off course. A single misstep, if not caught and corrected promptly, can have serious consequences for your business. Conversely, being able to swiftly identify and capitalise on new opportunities can drive significant growth.

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What is a variance report, and why is it important?

A variance report is a financial tool used to communicate discrepancies between actual performance and what was forecasted. These reports are typically part of the company's regular financial reporting and can be presented as written documents, presentations, or both.

Variance reports help companies adjust their operations based on data-driven insights to achieve better efficiency and financial performance. They document the differences (variances) between actual results and planned or forecasted results.

In variance reporting, "positive" and "negative" refer to the numbers. If the actual value is higher than the forecasted value, the variance is positive. If the actual value is lower, the variance is negative.

"Favourable" and "unfavourable" describe the impact on your business. Favourable variances indicate areas where performance exceeded expectations, suggesting potential for further investment. Unfavourable variances highlight areas where performance fell short, pointing to issues that need addressing.

• Favourable Variances: Highlight high-performing areas that might benefit from additional investment.
• Unfavourable Variances: Identify bottlenecks or issues negatively impacting your performance.

By using variance reports, you can make informed decisions to fine-tune your operations and steer your business towards its goals.

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What does a variance report contain?

Actual vs. budgeted / forecasted figures: This is the core of the variance report. It shows what was expected (budgeted or forecasted) versus what actually happened in terms of revenue, expenses, and other financial metrics.

Variance analysis: This section digs deeper into the numbers to identify the variances and understand why they happened. By exploring the reasons behind the discrepancies, you can get valuable insights that help you make data-driven decisions to improve your business.

Identification of key drivers: Key drivers are the factors causing the variances, such as market fluctuations or operational inefficiencies. The report usually includes notes explaining these drivers, providing crucial insights into what's affecting your financial performance.

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How to create a variance analysis report: A step-by-step guide

Creating a variance analysis report might seem daunting at first, but it’s a powerful tool that can get you valuable insights into your business's performance. Here’s a step-by-step guide to help you through the process, complete with formulas and examples.

Step 1: Gather your data

First, you need to collect your actual and budgeted or forecasted data. This includes revenue, expenses, and other key metrics. Make sure the data is accurate and up-to-date.

Example: Let's say you budgeted $100,000 for marketing expenses for Q1, but your actual spending was $120,000.

Step 2: Calculate the variance

Next, calculate the variance for each line item. The basic formula is:

Variance = Actual value - Budgeted value

Example: For the marketing expenses: 

Variance = $120,000 - $100,000 = $20,000

Step 3: Determine the percentage variance

To get a better sense of the variance's impact, calculate the percentage variance. The formula is:

Percentage variance = (variance/budgeted value) x 100

Example: For the marketing expenses: 

Percentage variance = ($20,000/$100,000) x 100 = 20%

Step 4: Categorise the variance

Start by checking whether the variance is favourable / unfavourable. A favourable variance is when actual revenue is higher than budgeted or when actual expenses are lower than budgeted. An unfavorable variance is the opposite.

Example: In this case, spending $20,000 more than budgeted on marketing is an unfavourable variance.

Step 5: Identify the causes

Now, you need to dig deeper to understand why the variance occurred. Look at both internal and external factors that might have contributed.

Example: You might find that the extra marketing spend was due to an unplanned but necessary ad campaign to counter a competitor's aggressive marketing.

Step 6: Analyse the impact

Assess how this variance impacts your overall financial health and strategic goals. This helps you understand whether the variance is a one-time event or something that needs ongoing attention.

Example: Determine if the extra $20,000 in marketing spend resulted in a significant increase in new customers, which could justify the expense.

Step 7: Take action

Based on your findings, decide on the necessary actions to address the variance. This could involve adjusting your budget, changing your strategy, or implementing cost controls.

Example: If the ad campaign was successful, you might consider allocating more budget to marketing in future quarters. If it wasn't, you may need to tighten your marketing spend.

Step 8: Report and communicate

Create a detailed variance analysis report summarising your findings and actions. Make sure to communicate this report to stakeholders, such as your management team or investors.

Example report outline:

1. Introduction: Overview of the purpose / scope of the variance analysis.
2. Summary of variances: Table of key variances, including amounts and percentages.
3. Detailed analysis: Explanation of significant variances, their causes, and impacts.
4. Action plan: Steps taken or proposed to address the variances.
5. Conclusion: Summary and next steps.

Step 9: Review regularly

Variance analysis should be an ongoing process. Regular reviews help you stay on top of your financial performance and quickly address any emerging issues.

Example: Schedule monthly or quarterly variance analysis reviews to keep your business on track.

By following these steps, you'll be able to create a thorough variance analysis report that not only highlights where your business is deviating from its plan but also provides insights into how to improve performance moving forward.

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Why do SaaS companies need variance reports?

Variance reports are crucial documents that help companies identify and explain differences in their business performance. They play a vital role in interpreting your company’s overall financial health and highlighting areas that need immediate attention.

• Legal and investor requirements: Public SaaS companies are legally required to provide detailed variance information in their financial disclosures to auditors. While private SaaS companies aren't legally bound, they still routinely share variance reports and other SaaS-specific metrics with their board and investors.
• Actionable insights: These reports are more than just bureaucratic formalities; they're catalysts for change. They offer insights that assist you to make data-driven decisions to propel your business forward.
• Performance monitoring: Variance reports help in continuously monitoring performance against set goals, allowing for timely adjustments and strategic pivots.

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How to spot trends with variance reports?

One of the major benefits of variance reports is their ability to uncover trends and patterns in business performance. By comparing budgeted figures to actual expenses over time, finance teams can identify patterns, spot inefficiencies, and leverage opportunities.

• Trend identification: Whether it’s a sudden increase in subscription / cancellations / an unexpected surge in software adoption, regular variance reporting ensures you’re never caught off guard.
• Proactive management: With regular variance analysis, you can proactively manage risks and seize growth opportunities, ensuring your business stays on the right track.
• Resource allocation: Understanding variances helps in making informed decisions about resource allocation, ensuring that funds are directed toward the most impactful areas.

Regular variance reports provide the insights needed to keep your SaaS company agile and responsive in a dynamic market environment.

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Common types of variances SaaS companies need to track

Financial variances: These involve comparing your actual results with the expected results you planned / forecasted for specific line items in your profit and loss (P&L) statement and your balance sheet. This helps you understand where you are financially compared to where you thought you would be.

Operational variances: These focus on how the company is performing in terms of its strategic goals rather than just financial performance. This includes tracking key SaaS metrics such as customer acquisition costs (CAC) / monthly recurring revenue (MRR). Since most SaaS metrics are calculated using multiple financial line items, these reports offer a more nuanced view of your operational performance, highlighting areas where you may need to adjust your strategy to stay on track.

Types of financial variances

There are two main types of variance reports that show financial variances: the income statement variance report and the balance sheet variance report.

Revenue variances

Revenue-related variances are reported on the income statement. These variances show the difference between projected and actual sales.

There are three types of revenue variances:

1. Sales volume variances: This type helps you assess whether your sales strategies are effective. For example, if your SaaS company sees fewer new sign-ups than anticipated, it could indicate a need to tweak your marketing or sales approach.
2. Customer base variances: This measures the difference between your projected and actual customer base. For instance, if your actual customer count falls short of projections, you might need to investigate churn rates and retention strategies.
3. Price-Related Variances: These variances occur when there are changes in the prices of your services. For example, if you increased subscription fees and saw a higher revenue than forecasted, the variance would be positive and expected.

Cost variances

Cost variances are also reported on the income statement and highlight differences between projected and actual costs.

Two important types of cost variances to track are:

1. Hosting costs: Cloud hosting expenses can be highly variable. For instance, if your hosting costs are lower than projected, it might indicate reduced customer engagement or higher churn, which would need further investigation.
2. Marketing costs: These expenses are often discretionary. For example, an unplanned investment in a marketing campaign might result in higher costs than budgeted, reflecting a strategic shift or an unforeseen opportunity.

Asset variances

Asset variances help determine your company’s financial standing and future growth steps. These are reported as balance sheet variances.

Key asset variances include:

1. Cash on hand: Monitoring cash reserves is crucial. A higher-than-expected cash reserve might indicate efficient operations or better revenue collection, while a lower reserve could signal potential liquidity issues.
2. Intellectual property (IP): This includes software, patents, and trademarks. For example, if the value of your IP is higher than anticipated, it could indicate strong market recognition and validation of your R&D efforts.

Liabilities variances

Tracking liabilities variances, reported as balance sheet variances, provides insights into your company’s financial commitments.

Important liabilities variances include:

1. Interest payable: This is the interest expense owed but not yet paid. A lower-than-expected interest payable could mean better loan terms or effective debt management, while a higher amount might indicate escalating borrowing costs.
2. Bonds payable: Variance in bonds payable can reflect how well your company manages its long-term debt. For example, a lower bonds payable than expected could signal effective debt management and increase investor confidence.

Equity variances

Equity variances provide insights into your company’s health and are reported as balance sheet variances.

Key equity variances include:

1. Retained earnings: This is the difference between actual and projected retained profits. If your company retains more profit than expected, it could indicate strong financial performance.
2. Shareholders’ equity: This represents the company's net worth. A variance here shows the difference between expected and actual equity, reflecting overall financial health.

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Understanding operational variances in SaaS Metrics

Why is tracking operational variances important for SaaS companies?

While tracking financial variances is crucial for effective financial management, there are also non-financial KPIs that provide deep insights into your business's operational efficiency. These operational metrics help you understand how well your business is functioning beyond just the financials.

What are some key operational metrics SaaS companies should track?

The specific metrics to track will vary depending on your business goals. However, there are some universally important metrics for all SaaS companies, such as Annual Recurring Revenue (ARR) and churn rate. These revenue-related metrics are essential for understanding your company's financial health. Additionally, efficiency-related metrics like the SaaS magic number, SaaS quick ratio, and LTV

(Lifetime Value to Customer Acquisition Cost) shows valuable insights into various aspects of your business.

Can you give an example of how variance analysis works for a metric like LTV?

Sure! Let's say your LTV ratio moved from 5:1 last quarter to 4:1 this quarter. To understand this variance, you first need to identify which part of the ratio has changed.

• If CAC has increased: Look into your marketing and sales expenses to pinpoint the specific costs that changed. This helps you adjust your strategy to control costs.
• If LTV has decreased: Examine customer behaviour to determine what's impacting LTV. Are customers downgrading or churning more? Understanding these patterns can help you address the underlying issues.

Why can analysing variances in operational metrics be complex?

The answers aren't always straightforward. For example, if a decrease in LTV is driving the variance in LTV, it could be due to external factors like a tighter economy. However, the churn component of the variance might be driven by operational issues such as poor customer support or recent changes in pricing. Investigating these areas helps you fully understand the variance.

What should companies do with the insights gained from variance analysis?

By analysing variances in key operational metrics, you can identify and understand the drivers behind these variances. This is the first step in addressing any issues and improving your business processes. Although it can be time-consuming, this analysis is essential because you can't fix problems you don't see.

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