Mastering Variance Analysis: The Key to Accounting Excellence and Business Insights

Introduction

As an Accounting professional, the ability to perform thorough and insightful variance analyses can be a game-changer in your career.

Variance analysis is a critical step in the financial close process, allowing you to uncover accounting errors, identify business performance trends, and provide valuable insights to key stakeholders.

In this comprehensive blog post, we'll dive deep into the two main types of variance analyses - the accounting variance analysis and the business variance analysis - and explore how mastering these techniques can elevate your skills and make you an indispensable asset to any organization.

1) Accounting Variance Analysis

The accounting variance analysis is primarily focused on identifying and addressing any errors or discrepancies in your financial records. The purpose of this analysis is to ensure the integrity and accuracy of your books before finalizing the period's financial statements. By performing this analysis, you can catch missed accruals, double bookings, or any other issues that could lead to inaccuracies in your financial reporting.

The timing of the accounting variance analysis is crucial - it should be conducted before the period close, allowing you to make any necessary corrections and adjustments before the books are finalized. The typical audience for this analysis includes the controller, VP of accounting, and the accounting team in general.

Let's walk through an example of how to perform an accounting variance analysis:

• Gather the necessary data: Obtain the income statement or any other relevant financial statements for the current and previous periods.

• Set up the analysis: Create columns for the current period, previous period, the change amount, and the percentage change. Add a column for comments to document your findings.

• Calculate the changes: Determine the change amount by subtracting the previous period's value from the current period's value. Calculate the percentage change by dividing the change amount by the previous period's value.

• Identify material variances: Review the changes and percentage changes to identify any variances that are significant enough to warrant further investigation. Align with your internal team on the materiality threshold for your organization.

• Investigate the variances: For the material variances, dig deeper to understand the root causes. This may involve reviewing headcount reports, bonus accrual schedules, or other supporting documentation.

• Document your findings: Provide clear and concise comments to explain the reasons behind the variances. Be sure to use language that is appropriate for the accounting team's audience.

Learn my process of creating air-tight books/records ​here​.

2) Business Variance Analysis

While the accounting variance analysis focuses on the integrity of the numbers, the business variance analysis is all about providing valuable insights to key stakeholders, such as senior executives, the CEO, CFO, board of directors, and investors. The purpose of this analysis is to shed light on the company's performance and identify trends that can inform strategic decision-making.

The timing of the business variance analysis is after the period close, as it relies on the finalized financial statements. This analysis is typically presented to a higher-level audience, who are interested in understanding the business's overall performance and the factors driving it.

Conducting the Business Variance Analysis

The process for the business variance analysis is similar to the accounting variance analysis, but with a different focus and presentation:

• Gather the data: Obtain the same financial statements used for the accounting variance analysis, but this time, the focus is on the business performance rather than accounting accuracy.

• Set up the analysis: Create columns for the current period, previous period, the change amount, and the percentage change. Add a column for comments, but this time, the comments will be tailored to provide business insights.

• Calculate the changes: Determine the change amount and percentage change, just as you did in the accounting variance analysis.

• Identify material variances: Review the changes and percentage changes, but this time, look for variances that are significant from a business perspective. These may not necessarily be the same as the accounting materiality thresholds.

• Investigate the variances: For the material variances, dig deeper to understand the underlying business drivers. This may involve reviewing budgets, sales reports, or other operational data.

• Craft your business insights: In the comments section, provide clear and concise explanations for the variances, focusing on the business implications. Highlight the department or function affected, and explain how the variance aligns with the company's budget or strategic objectives.

Career Advancement Opportunities

Proficiency in variance analysis is a highly sought-after skill in the accounting and finance industry. By showcasing your expertise in this area, you can differentiate yourself from your peers and position yourself for career advancement opportunities, such as promotions, leadership roles, or even the opportunity to join the ​Controller Academy​ program, where you can further develop your skills as a financial controller.

Putting it All Together: A Comprehensive Variance Analysis Example

Let's bring everything together with a comprehensive example of how to perform both the accounting variance analysis and the business variance analysis:

Key Takeaways

• The accounting variance analysis focuses on identifying and addressing accounting errors, while the business variance analysis provides insights into the company's performance.

• The accounting variance analysis should be conducted before the period close, while the business variance analysis is performed after the close.

• Effective variance analysis can improve financial reporting accuracy, enhance business insights, and lead to career advancement opportunities.

• Mastering both the accounting and business variance analyses can make you a valuable asset to any organization.

• Consider enrolling in the ​Controller Academy​ program to further develop your skills as a financial controller.