A budget variance is a fact, but on its own it explains nothing. Knowing that payroll ran 8% over budget says nothing about where that happened, whether it will happen again, or what to do next. Properly explaining a variance means working through where it occurred, whether it's temporary or structural, whether it was foreseeable, and what needs to happen next.
The short version
- A variance headline like "8% over budget on payroll" is a fact without an explanation. What's important is why this happened.
- Four questions do most of the work: where did it happen, is it temporary or structural, was it foreseeable, and what needs to happen next.
- The reason these questions are hard to answer is often a data rather than an analysis problem. If the general ledger only holds a total, someone has to rebuild the breakdown by hand every time.
- Working through a variance properly means going from the headline number to the department or site behind it, then to the transactions that drove it.
- It's worth building the habit of asking these questions before someone asks them of you.
Finance teams that handle variances well have built a habit of asking the same handful of questions every time a variance shows up. Skip these questions and they tend to come up anyway, just later and when you're under pressure.
This article is the fourth in a series about reporting, following our guide to what should be in a board finance pack. It sets out those four questions, why they're often harder to answer than they should be, and what a properly investigated variance looks like once someone's worked through it.
Most variance explanations stop too early
Many people present the number that describes a variance, without answering the question "why?"
The instinct to stop at the headline number is understandable. It's the number the report was built to show and producing it already took effort. But a variance without a cause attached invites a follow-up question that then has to be answered, often live in a meeting or under time pressure, instead of being worked through calmly beforehand.
The questions worth asking
Four questions turn a variance from a number into something a director or budget holder can act on.
- Where did it happen? Which entity, department, site or project? An organisation-wide payroll variance is a different problem depending on whether it's spread evenly or concentrated in one place.
- Is it temporary or structural? A one-off cost or a timing difference corrects itself. A genuine change in the underlying cost base doesn't – and it needs the budget itself revisited, not just an explanation for this month.
- Was it foreseeable? And if so, why wasn't it reflected in the budget in the first place? This is the question that can reveal the need for a process improvement.
- What, if anything, needs to happen next? Not every variance requires action. The ones that do need a clear answer for what that action is, not just an acknowledgement that something happened.
Why the answer is usually a data problem in disguise
An adverse payroll variance might need explaining by entity, department, role type or site, depending on where the answer to the "where?" question leads. That breakdown only exists if the finance system was set up to provide it in the first place.
If the general ledger, the core accounting record an organisation keeps of every transaction, only holds the total, someone has to create that breakdown by hand outside the finance system every time a variance needs explaining.
The questions we raised in the previous section can only be answered quickly if the data underneath the total was tagged that way from the start.
Accounting dimensions – the tags that allow a number to be sliced by department, site or project – are one way of solving this properly rather than creating an analysis from scratch.
What this looks like worked through
Here's an example. A finance team spots that IT and software costs ran 12% over budget for the quarter, group-wide. The team works through it, asking the questions we mentioned earlier.
Where did it happen? Breaking the total down by department shows the variance isn't evenly spread. Most departments are on budget. Customer support accounts for almost the entire overspend.
Temporary or structural? Part of it is a one-off true-up payment for licence seats that had gone under-billed for months. The rest is an ongoing monthly increase that shows no sign of dropping back down next quarter.
Was it foreseeable? The department had added six new starters over the previous two months, each needing their own licensed seats. Team leads knew about the hires well in advance but nobody flagged the extra software cost to the person who manages that budget line until the invoices arrived.
What needs to happen next? Two things: the one-off true-up gets explained as exactly that, a backdated correction that won't be repeated, and separately, the ongoing run rate gets built into the budget going forward, along with a process whereby new hires trigger a note about the licence cost they bring with them.
That's the difference between stating the plain fact of being over budget and an answer someone can use.
A practical habit for teams
The above questions are best asked as soon as the variance arises, not after it's queried at a board meeting. If you review variances as a routine part of your month-end close, you'll go into the new month well-informed. When board or management meetings come around, you'll have answers ready, with no need to promise that you'll look into that variance and come back.
This principle applies whether the breakdown by department or site takes five minutes to pull together or a day of manual reconciliation. But it's a much easier habit to keep when the data doesn't have to be put together from scratch each time.
Where iplicit fits
If your general ledger can provide you with the answer to the "Where did it happen?" question in minutes, you're most of the way there.
iplicit's cloud accounting software supports unlimited dimensions across the general ledger, so a variance can be broken down by department, site, project or cost centre without restructuring the chart of accounts.
To see it in action, take the 3-minute tour, or book a personalised demo to see how it would work for you.
What is a budget variance?
A budget variance is the difference between what was budgeted for a cost or revenue line and what actually happened. On its own, it's a number, not an explanation. Understanding a variance means working out where it occurred, why, and whether it needs any action.
Why isn't stating the size of a variance enough?
Because it doesn't say where the variance happened, whether it will recur, or what caused it. "8% over budget on payroll" is the starting point for an investigation, not the answer to one. The useful information is in the questions asked afterwards, not the headline figure itself.
What questions should you ask before explaining a variance?
Four: where did it happen (which entity, department, site or project), is it temporary or structural, was it foreseeable, and what needs to happen next? Working through these turns a number into something a board or budget holder can act on.
Why do budget breakdowns sometimes take so long to produce?
Usually because the general ledger only holds a total, and the breakdown by department, site or role has to be rebuilt manually outside the finance system each time. Setting up that structure properly in advance, rather than reconstructing it after the fact, is what makes variances quick to investigate.
