FP&A and Budget Variance Analysis: 5 Common Pitfalls and How to Avoid Them

Budget Variance Analysis isn’t just a checkbox exercise; it has the potential to supercharge FP&A goals and establish them on strong foundations that enable accuracy, agility and continual improvement for the entire company.

To make the most of the BvA process, FP&A teams need to ensure that they approach it with strategy, attention to detail and the right analytical mindset. They also need to avoid five common pitfalls.

Pitfall 1: Inaccuracy in Budget Variance Analysis

The objective of budget variance analysis is to establish not just the discrepancy between the predicted budget spend and results, and the actual ones, but also the reasons behind that difference.

For both of these aspects, accuracy is key. If you calculate the variance incorrectly, you’ll have a mistaken view of the financial situation of the company. If you fail to analyze the details behind the data properly, you’ll draw the wrong conclusions. In either case, it’s misleading and even potentially disastrous for the company.

There are some particularly common mistakes that lead to inaccuracy entering the process. Here’s what you’ll want to make sure you’re avoiding:

• Tunnel vision. When you know the main results that you need from a process, it’s easy to succumb to the mistake of tunnel vision, when your laser beam of concentration means that you miss crucial connections and hints from elsewhere. This is especially problematic in a BvA process, where the point is to uncover the real reasons behind variance.

• Manual errors. There’s a huge amount of data involved in budget variance analysis. Until recently, there was no way to handle this other than manually. We’ve all had that moment near the very end of a process when someone realizes that a key figure has to be recalculated because of something as simple as that someone had copied the wrong line from a spreadsheet somewhere, or put the decimal point in the wrong place.

• Excel overload. Excel is an amazing tool, and it’s going to continue being a key part of the FP&A toolkit for a long time to come. To leverage the full benefits of an in-depth BvA process, however, you may want to consider a dedicated FP&A platform instead. When there’s that much data involved, when comparisons between different sets of data are key, and when robust analysis and collaboration with budget partners are valuable, you need to leverage tools made for the challenge.

• Data silos. One of the challenges of budget variance analysis is that you need to compare the data from different departments who might not often work together. They may have different definitions for terms, or store data in different ways, or have varying metrics of success which impact their own analysis of data. Make sure you’re taking this into account and mitigating any potential bumps.

• Exclusively internal focus. Sometimes, the real reason for the variance you’ve identified lies outside your company. It might be a change in the industry you’re working in, or the cost of goods or services on which you rely, or a factor in the wider supply chain or in buyer behavior. Whatever it is, you need to know about it. Don’t restrict your vision to what’s going on inside the organization.

Building a BvA process that is structured to avoid these mistakes takes thought, but with the technologies that have evolved in recent years, isn’t difficult. A single system such as Firmbase’s FP&A platform can centralize data from multiple sources and diverse departments and provide it to your team in intuitive, easy to use formats.

This enables you to ensure an expanded vision, including external factors, and avoid data silos and manual or spreadsheet-related errors. It also means that the team’s experience and expertise can be leveraged for analysis and searching for valuable connections and learnings, rather than being wasted on repetitive and frustrating tasks.

Pitfall 2: Accepting Easy Explanations for Budget Variance

Sometimes, doing budget variance analysis the right way means facing uncomfortable truths. It’s always tempting to downplay these, or sweep them under the rug by looking at and emphasizing other factors.

For BvA to be valuable, and for the FP&A team to show that they’re the powerhouse that the organization requires, everyone involved needs to be willing to accept what the data says.

Some common reasons to “cheat” on a budget variance analysis process:

• Executive impact. An executive made the decision that led to significant negative variance.

• Safeguard malfunction. The cause of serious negative variance was the result of a mistake that multiple levels of safeguards failed to prevent.

• The human factor. Personality challenges, either in terms of avoiding hurt feelings or avoiding bad temper and its potential repercussions.

• Company priority. A key factor resulting in negative variance is tied to the main company focus or goal for the year, and no one wants to highlight a problem with it.

• Positive glow. There’s positive variance, and someone senior strongly wants to tie it to a specific decision or set of causes they espoused – but BvA discovers that wasn’t really what happened.

The way around this is to distinguish between on the one hand data-driven analysis and the recommendations that come from it, and on the other hand assigning blame.

The fact that you’ve uncovered a mistake doesn’t mean someone needs to be blamed for it. On the contrary, there are often good reasons for the decision that was taken. When the right lesson can be learned from what resulted, everyone benefits.

Doing this right relies on company culture. If you suspect that your organization might struggle in this area, that’s a conversation worth having, respectfully and outside the budget variance analysis cycle, with leadership. Because that kind of weakness can undermine the strength of an entire business.

Book your demo and see how Firmbase eliminates data silos & brings your teams together.

Pitfall 3: Failing to Be Objective & Data-driven

As indicated by Pitfall 2, budget variance analyses can be impacted more than many people realize by the intricacies and sensitivities of human factors in an organization.

There’s a reason that’s particularly present in BvA. If the variance is negative, those involved in the reasons for that may feel defensive. If it’s positive, there may be jostling for credit.

The antidote for these challenges is for FP&A teams to ensure that the process is entirely objective and data-driven.

You’re looking at what happened and why it was different to what was expected. But the reason you want to know that is in large part so that you can make the right decisions about what to do next, to improve the company’s position and results.

Approach all stakeholders and departments as partners. When there are things they are going to need to change, solicit their experiences, expertise and opinions on the best ways to achieve that change. The language should always be about working together to work out the best path for the company.

Pitfall 4: Skimming Over Positive Budget Variance

Good news is good, and that’s great. But in a budget variance analysis, you also want to know why it’s good.

It can be tempting for teams to focus all their BvA energies on negative variance, to ensure that the organization is well positioned to improve their performance and results in the coming months. That’s crucial, of course.

Just as important, though, is uncovering the reasons behind positive variance.

When the numbers are better than expected, you want to know why, so that you can try to ensure that you do more of what’s working (and less of what wasn’t). You might even be able to apply lessons learned to other areas of the company, increasing efficiency and results all round.

Don’t accept the simplest explanation for positive variance and move on. If sales results are up, what changed in the sales process? The sales team? The customer experience leading up to sales? The marketing? Business development initiatives? Dig in to find the real reasons behind the good news.

Pitfall 5: Non-actionable Budget Variance Analysis

Budget variance analysis is an intensive and time-consuming process. By the time FP&A teams get to the end, they rightfully feel that they deserve a break. As with many things in life, though, the last step is in some ways the most important, because it ties it all together.

In-depth data sourcing, comparison and analysis is the foundation of BvA. However, what makes budget variance analysis powerful in an organization is the recommendations that come from it. For these to be truly effective, they need to be directly actionable.

Don’t leave department leaders or executives to draw their own conclusions. Ensure that your suggestions are clearly laid out, backed by data, and presented in a way that is directly relevant to the day-to-day reality of your organization.

In some cases, it will be appropriate to examine more than one option for a change in behavior, and present the most likely outcomes in each case. Again, make sure that each option has actionable steps.

The easier you make it for colleagues to understand and follow through on your recommendations, the greater the value of all that hard BvA work you just completed. That’s great for the organization, and also for the perception of the FP&A team.

How to Improve Budget Variance Analysis

In order to improve a budget variance analysis, you need to:

• Understand the process fully.

• Ensure you’re not engaged in a checkbox exercise.

• Prioritize accuracy in both data and analysis.

• Avoid easy explanations.

• Emphasize objectivity, data-driven conclusions and a focus on the future.

• Dive into positive variance.

• Make all suggestions actionable.

Once you’ve invested to create a framework for a reliable process, your budget variance analysis will become smoother and more effective, and achieve the impact you want for your team and your organization.