When you think of variance, you probably think of something going wrong.

However, examining variances can serve as an indication of what’s behind the numbers- not necessarily meaning that something is wrong, but rather that something is driving different results than expected.

Variance analysis examines deviations in financial metrics relative to some former time period or budget. By breaking down deviations into various drivers (such as productivity, volume, and cost), such breakdowns can serve as hints regarding the components and reasons behind the variance interpreted.

CFO.com surveyed 154 senior finance executives at Fortune 500 companies, and on average they rated the importance of variance analysis at 8.7 on a 10-point scale.

That’s pretty high up.

Point being, variance analysis can highlight issues that we can draw important lessons from, and reveal real business insights to help us learn what to do differently.

What can we deduct from variance analyses? According to PerformanceCanvas, there are 5 key takeaways:

1. The correctness of assumptions

Did revenue hit our target number? If not, why? Do we have less or more people looking to subscribe? If our actuals differ from our budget or expected values, it’s worth looking into why. You can learn a lot from assumptions made and examining why they didn´t turn out as hoped.

2. The turnout of expenses as percentage revenue

The use of percentage of revenue budget against actual comparison helps a business in its other expenses such as payroll, sales and marketing, R&D, etc.

If the percentage is reduced, it means the company is improving in its efficiency and profitability whereas inflating of the percentage could tell otherwise. Reduction in percentage helps your business and its investors predict the long-term performance of the business.

3. The appropriateness of spending

In any business, financial discipline is key. It is very important to look at why a specific vendor provided a service cost that is more than budgeted. You need to be able to speak to them where the difference is coming from and why.

The same is true with all the employees of the company, each one must be held accountable through good internal policies that control these spendings. Of course, each expense must be carefully weighed against the well-being of the employee who incurred the expense and how the company benefits from this spending.

4. Consistency of margins

It is important to review budget variance on a regular basis in order to see a potential concerning trend. Even though the sales numbers turn out as expected and the product or service seems rather well accepted, budget variance analysis could sometimes show that there is decrease in profit margins. Seeing a trend like that through variance analysis calls for an internal discussion on the ability of the business to take in lower profit margins or if something else needs to be done.

Without variance analysis, it is easy to get tricked that everything is going smoothly by just basing on sales figures. Therefore, variance analysis is necessary in order to sustain growth and maintain alignment.

5. Evaluation of product lines or services

Budget vs actual variance analysis gives you a good opportunity to look at how each of your budgeted product or service is performing against budget and whether or not the spending should maintain the same.

Variance analysis lets you evaluate your sales and marketing focus in order to truly maximize profitability.

Sounds great, what’s the problem?

In many organizations, the near exclusive focus is on financial outcomes rather than how those financial results will be achieved.

When FP&A functions optimally, the department is used not just to predict results, but also to drive them. They deliver insights to the executive team by coming up with strategies for achieving their goals. In this way, variance analysis provides business value.

The best way to do this? Adopt financial tools that make variance analysis easy and smooth- sailing. Top systems to check out include DataRails, Jedox, and Host Analytics.