B. Trend variances – small, continual changes over time, that incrementally diverge from expected.
- This month’s v last month’s
- August 2014 v August 2015 – both acutals and budgets
What can seem normal, can seem so because we are used to it. Trend analysis is a bit like watching your weight; when you check your scales each day, it only seems like tiny changes, but if you look at this birthday compared to your weight last birthday that is when you notice the few extra kilos have snuck on … Trend analysis puts a spotlight on the changes that creep up little by little, that may not have been obvious in the month to month reviews. A good example of a creeping cost is Electricity Usage, – month by month it vary with the season and productivity etc, but reviewing this year against last year is where any increases become clear.
Tip 3. Understand the TIMING – ask the question “WHEN is there a difference?”
Sometimes differences arise simply because of a lack of information entered into your systems.
What typically happens is that a relevant invoice has not yet been received or a payment relating to this period was made in an earlier period. In either case variances will arise in both the month the invoice was expected and not received, and the later month when the invoice is entered but not expected.
The idea of ‘Accrual accounting’ is to recognise all the income and outgoings for the period in that same period, irrespective of whether or not cash has actually passed between customer and supplier. If you are not using accrual accounting, or something went haywire with the timing of the data entry a budget problem can arise.
The good thing about timing variances is they “reverse” because what was short this period will appear in the next, or what was extra in this period will be missing next period. i.e. when the two months are added together, you end up in the right spot overall. As long as the variance is explainable as “reversing” in the next period, other than ensuring the expected reversal takes place then no further action need be taken.
Tip 4. ANALYSE the reason for the Variance – asking the question “WHY is there a difference?”
Once you know the source of the budget problem, the most powerful question you have at your disposal is WHY did this occur?. The difference could simply have arisen because of a data entry typo – so don’t panic or start by yelling and the wrong people for the wrong things! Begin by making sure what you are looking at is accurate.
Apart from errors, in all other cases a Budget Variance is the result of either:
* A price that was different from expected/budgeted
* A volume (amount) that was different from expected/budgeted
To be able to take any corrective action you must work out which element, or both, are involved…
TRICK: Ask “WHY” more than once, it can take up to seven times of asking WHY to drill down to the real cause that needs to be addressed – stopping too soon may mean you don’t get to the bottom of the issue and this will mean that any changes you try to make will be targeting an incorrect area. This part requires quite a bit of patience from both the questioner and the answerer, a bit of lateral thinking and investigation, and also an understanding that “I don’t know” simply means more research is needed.