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variance analysis

Also called: plan vs actual, budget variance, budget vs actual

Comparing actual results with the plan and splitting the difference into its causes, such as price, volume, mix and currency.

Variance analysis compares actual results with the plan and splits the difference into causes that add up exactly to the total. The usual causes are volume (more or fewer units), mix (a shift between products with different margins), price (what customers actually paid) and currency (exchange rates different from the plan's), plus cost variances such as a higher payout per unit.

Compare on contribution or profit, not just sales: a month can beat its sales plan and still earn less, if the extra sales came from a discount or from lower-margin products. And value each cause separately, in a fixed order, so that the parts add up: volume at the plan's average margin, mix as what is left when units shift between products, price at the plan's exchange rates, currency last.

The point is a conversation with the right owner. "We missed by 54,697" invites a shrug; "volume added 52,056, a price cut took 112,320 and a weaker hryvnia hid part of it" tells marketing, pricing and finance what to look at. Variances that come from the outside world, like exchange rates, are nobody's merit or fault and should be shown apart from the team's own drivers.

Example

Klasna's September: sales came in at 3,709,960 UAH against a plan of 3,647,800, 62,160 ahead. Contribution came in at 996,149.75 against 1,050,847: 54,697.25 behind.

Cause
Effect on contribution, UAH
Volume: 5,890 lessons instead of 5,612
+52,055.50
Mix: more English in Ukraine, fewer maths and programming
−11,557.50
Price: a promo on English in Ukraine, a lower programming price
−112,320
Currency: EUR at 47 instead of 45, USD at 43.50 instead of 42
+17,124.75
Total
−54,697.25

The headline "sales beat plan" hid a price cut; a weaker hryvnia, which nobody at Klasna controls, hid part of it again.

Common mistakes

  • Judging the month by sales. A discount can lift sales and cut contribution at the same time.
  • Parts that don't add up. Fix the order (volume, mix, price, currency) so the causes sum to the total.
  • Mixing currency into price. Compute price at the plan's rates; otherwise exchange-rate luck looks like pricing skill.
  • Comparing with a plan at the wrong volume. For costs that follow volume, flex the plan to actual volume first.
  • Stopping at the numbers. Each variance needs an owner and a decision: keep, fix or update the forecast.

Learn it in the course