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.
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.
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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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.
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:
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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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.
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.
Regular variance reports provide the insights needed to keep your SaaS company agile and responsive in a dynamic market environment.
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.
There are two main types of variance reports that show financial variances: the income statement variance report and the balance sheet variance report.
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:
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:
Asset variances help determine your company’s financial standing and future growth steps. These are reported as balance sheet variances.
Key asset variances include:
Tracking liabilities variances, reported as balance sheet variances, provides insights into your company’s financial commitments.
Important liabilities variances include:
Equity variances provide insights into your company’s health and are reported as balance sheet variances.
Key equity variances include:
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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.
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.
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.
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.
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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