What is Variance Analysis in Accounting? How to Discover Financial Deviations

What is variance analysis in accounting?

Variance analysis enables business owners to uncover deviations, on both the cost and revenue side, from what was expected, from what was planned or budgeted, or from past experience.

Why is variance analysis important?

Variance analysis enables business owners to identify issues. 

• It identifies areas for improvement, 
• An unrealistic budget, 
• Even accounting errors such as a missed payment or a duplicate charge. 

It also serves as an important control mechanism to help managers budget more wisely and more accurately.

Variance Analysis for a Personal Budget

Take, for example, your personal budget. Let’s say you expect your home’s utility bill to be $100 per month. When you look over your bank statement at the end of the month you find you have less money than you expected. That’s a variance.

Your research finds that, through automated bank payments, you actually paid $200 for utilities this month. You discover the utility company never received your payment last month and double-billed you this month. 

So, if this were illustrated in graph format, you would see a spike in utilities for this month and no charge for last month. Problem solved. Much the same happens in business, though, oftentimes, on a larger scale.

How does ARI perform variance analyses?

Each month, our accountants compare your organization’s profit and loss statements to the same period last year and to budget (if applicable), and also look at month-to-month trends. If we see something out of the ordinary, we’ll investigate the discrepancy between what was planned and what actually occurred financially. We always work to answer the question “why?”

We will report any variances to management, ask pertinent questions, and reveal what we believe to be the root cause or causes.

Perhaps your restaurant saw a significant spike in its purchased food inventory costs this month. When we look into it, we see there were significant price increases from multiple suppliers. Bringing this to the attention of our client as soon as possible allows the business to not only adjust its budget but also to consider increasing prices accordingly.

Or perhaps, when we analyze your monthly expenses, we find that we didn’t receive this month’s invoice for your company’s workers’ compensation policy. If we resolve this by submitting payment as soon as we discover the accounting variance, we can avert the possibility of the insurance company canceling your policy.

It’s important to note that variance analysis is generally a detective control rather than a preventive control – meaning that, as a tool, it helps detect issues after they occur.

Reports tailored to your needs.

We will customize our reporting to suit your needs and preferences. Some clients prefer a simple bulleted email noting variances or a short phone call to discuss spikes and dips in their analysis. Others request a monthly in-person meeting with their ARI account manager to review the variance analysis line by line. 

Whatever method works best for you, our team can accommodate.

Variance analysis protects your organization from fraud.

Small and mid-sized businesses are more vulnerable to fraud than larger organizations because there tend to be fewer oversight procedures in place. 

For example, one person may be responsible for handling all bookkeeping functions including collecting receivables, processing payments, paying invoices, making deposits, and recording these activities.

Because ARI serves as your independent, impartial, third-party accountant, we will alert you to any overspending, unauthorized spending, or other fraudulent behaviors.

Discover nine additional benefits of outsourcing your accounting function.

If you would like to explore whether ARI might be the right solution to manage your accounting function, contact us today.