Cost Variance Analysis

📊 Budget vs Actuals Isn’t About Comparing Numbers — It’s About Explaining Behavior After my last post on Budget vs Forecast, many asked me: “How do you track if the business is actually performing against the plan?” So I built a Budget vs Actuals + Variance Analysis dashboard that turns monthly numbers into decisions (snapshot attached). Here are the 3 parts that make the model valuable: ✅ 1. Monthly targets that reflect real business behavior Instead of splitting the annual budget by 12, I adjust for: • Seasonality • Hiring plans • Projects & expansions • Revenue cycles A “correct” monthly budget removes fake variances and shows real performance gaps. ✅ 2. Automated variance analysis that tells a story Every month, the model updates: • Variance (amount + %) • Favourable vs unfavourable flags • Frequency of variance • Driver behind each gap (e.g., salaries, materials, transport) It stops the “we overspent” conversation and focuses on why it happened. ✅ 3. Dashboard that makes management act within minutes I keep it simple: • Budget vs Actual trend charts • Variance highlights • Top 3 drivers for the month • One-line insight for each major deviation Fast-moving companies in Saudi Arabia don’t need 10 tabs — they need clarity that supports Vision 2030 performance culture. What I enjoy most: Building dashboards that connect: Budget → Actuals → Insight → Action Because at the end of the day, the value of finance isn’t reporting data… it’s driving better decisions. 💬 If you could upgrade ONE part of your reporting today, what would you choose? • Better budgeting • Clearer variance analysis • More visual dashboards Comment below — I’d love your perspective. #Finance #FPandA #VarianceAnalysis #Budgeting #FinancialModeling #SaudiArabia #Vision2030

Most BIN owners don't do this one thing and it's costing them thousands, more often tens of thousands or more depending on their processing volume: Routine analysis of the numbers. Many just track net income. Maybe they also break it down by profitability at the merchant level. As processing volume grows, net income grows, and they leave it at that. But if this is your approach, I promise you're leaving money on the table. Much of this lost money is recoverable when you have access to good data and good analytics in place. I am going to break it down by sharing some of the analytical methods I use. First, I start with a high-level analytical review. Track these as a percentage of processing volume and as a percentage of total revenue: ➡️ Total merchant fees billed (this is generally the same as total revenue when you're the BIN owner, but still analyze it as a % of processing volume) ➡️ Interchange cost ➡️ Dues/assessments ➡️ Processing cost ➡️ Sponsorship cost ➡️ Third party costs like gateways, PCI, etc. ➡️ Residual expense The numbers from this vertical analysis will vary slightly based on a variety of factors like card mix, acceptance methods, weight of MCC types within your portfolio, etc. But in general, you shouldn't see big swings from month to month. If you do, it's your signal to dig deeper to find the reason. What do I do when I see swings that seem abnormal? ➡️ If it's in a category like interchange or dues/assessments, I'll break it down by card brand to see if I can narrow it down to which one is causing the swing. Then, I'll compare costs by item code or interchange category within that card brand over several months. ➡️ If it's in the residual expense category, I'll do a profitability analysis at the sales partner level to narrow down which relationship experienced the biggest variance. Perhaps it's explained by a legitimate reason, but it's possible it could have been caused by human error, which we can address once we identify it. ➡️ If it's at the processing level, I break it down for each processor and then compare costs by item code over the past several months. Sometimes we get billed for things that we shouldn't have. Or the billing rate is wrong. Here's what I want you to know: 💡 if something doesn't look right, don't be afraid to ask the party at the other end of what seems like a mistake-- whether it's a card brand, a bank, a processor, etc. I've seen billing errors happen at every level, and you need to have the confidence to ask about them. This is the highest level and perhaps the most simple review. You're looking for patterns in the data to tell you a story. But you shouldn't stop here. Tomorrow, we'll dig into a more detailed level of review. Stay tuned. 🙌

In a recent sell-side diligence, the seller thought their spend was under control. $70M a year - flat, predictable, nothing to worry about. Until variance analysis told a different story. We dug in and found: 🛑 Unit price drift: Suppliers quietly billing above contract 🛑 Supplier creep: Same items bought from multiple vendors across different locations 🛑 Payment term slippage: Invoices slipping to 30 days instead of 60 Individually, none looked material. But together, they added up to $2M of EBITDA erosion. At a 6x multiple, that’s $12M of enterprise value left on the table. That’s why spend variance isn’t just an analytic. It’s one of the fastest ways PE leaders can protect and grow value in a transaction.

Most variance bridges fail for one simple reason: They stop too early. Revenue down $3.2M vs plan. Volume explains $2.1M. Price explains $1.1M. Sounds clean. But it’s rarely complete. In real FP&A work, leadership doesn’t want a single-layer explanation. They want to know what drove the drivers. That’s where multi-tier waterfall charts earn their keep. A multi-tier waterfall decomposes each primary variance into secondary (and sometimes tertiary) drivers—without overwhelming the story. In Excel, the structure matters more than the chart itself: ▪️ Build a driver hierarchy table (Plan → Volume → Mix → Price → FX, etc.) ▪️ Use helper columns to calculate incremental impacts rather than totals ▪️ Feed the table into a standard Waterfall chart, letting Excel do what it’s good at—sequencing deltas The real FP&A value comes from how you design the logic: ▪️ Primary tier answers what changed ▪️ Secondary tier answers why it changed ▪️ Optional tertiary tier answers what’s controllable vs structural When used correctly, this approach: ▪️ Prevents oversimplified explanations ▪️ Makes bridge logic audit-proof ▪️ Aligns Finance, Sales, and Ops around the same narrative This is especially powerful for: ▪️ Exec reviews ▪️ Board decks ▪️ Post-close variance deep dives If your waterfalls still end at “Volume” and “Price,” you’re leaving insight on the table. At your company, do variance bridges drive decisions—or just explanations? I help FP&A teams design executive-ready variance waterfalls that go beyond surface-level drivers and actually hold up in the room.

Most variance analysis is wasted effort because it stops one step too early. Teams identify what changed. They explain why it happened. Then they submit the report. And leadership can't do anything with it. I've trained over 1,000 finance professionals at companies like Google, Merck, and Lowe's. The pattern is the same everywhere: Teams nail the What and the Why. But they skip the So What — the part that actually drives decisions. Here's how to fix it: 𝗦𝘁𝗲𝗽 𝟭: 𝗧𝗵𝗲 𝗪𝗵𝗮𝘁 Identify and quantify the variance. Be specific. "Professional fees are unfavorable by $251K" — not "costs increased." 𝗦𝘁𝗲𝗽 𝟮: 𝗧𝗵𝗲 𝗪𝗵𝘆 Find the root cause. Apply the 80/20 rule. If Deloitte is $267K over budget and the total variance is $251K, don't waste time tracking down the $16K offset. Focus on what matters. 𝗦𝘁𝗲𝗽 𝟯: 𝗧𝗵𝗲 𝗦𝗼 𝗪𝗵𝗮𝘁 This is where most teams fail — and where real impact happens. Bad: "Professional fees are up because of Deloitte." Good: "Deloitte raised their prices (not more hours). We should compare to other audit firms and consider a tender process." Notice the difference? One describes. The other recommends action. To find the So What, I use the ARCTIC framework: • 𝗔ctions — What should we do next? • 𝗥isks/Opportunities — Does this expose a risk or upside? • 𝗖ause — What's the real root cause? • 𝗧iming — Is this a timing shift or a real hit? • 𝗜mpact — How does this affect the forecast? • 𝗖ontrol — Is this inside or outside our control? When you standardize this across your team, leaders don't have to re-learn how to read each report. They know exactly where to find the variance, the why, and the recommended action. That's how you turn backward-looking commentary into forward-looking decision support. I break down the full framework in my new YouTube video. 👉 Watch the full breakdown here: https://lnkd.in/dsbZChME -Christian Wattig Director, Wharton FP&A Program Corporate Trainer, Inside FP&A

Most variance analyses stop at what went wrong. Even fewer offer guidance on what to do next. I've worked with a lot of clients that are very good at identifying and analyzing variances. But the problem with this is: → Rearview mirror reporting → No connection to what actually drove the variance → Zero clarity on what to do next Variance analysis should document what happened, and then clearly explain what to do next. ↳ Strategic variance analysis has three main components: 1. Divers: Not just what changed — but why. 2. Direction: Helps you adjust, not just reflect. 3. Action: Turns insight into decisions. Your numbers aren’t just performance metrics. They’re signals. Strategic finance listens, and responds. Here's a three step framework I use to turn variances into decisions. The output: - A ranked list of 3-5 critical variances with clear owners. - A one-page variance brief with root causes and next steps. - An action plan with specific deadlines and success metrics. Please share your thoughts in the comments. Share if you think it might help someone in your network. Follow me, Beverly Davis for more finance insights #Finance #Strategy #StrategicFinance #VarianceAnalysis #FinancialInsights #FinanceFrameworks

“𝗠𝗼𝗻𝘁𝗵𝗹𝘆 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 𝗥𝗲𝗽𝗼𝗿𝘁𝘀 — 𝗗𝗼𝗻𝗲 𝘁𝗵𝗲 𝗥𝗶𝗴𝗵𝘁 𝗪𝗮𝘆” I’ve prepared, reviewed, or sat in on at least 60 MPRs (Monthly Performance Reports/Reviews) so far 🙈 . And whilst I know that we can do more than MPRs (as I have stated in my bio), I will not talk down on what a great report can do on this side of our world. The best MPRs are sharp and decision ready. It connects numbers to business realities, quickly shows where we stand, and pushes action. And prepared well, it is a very important FP&A tool! The best MPRs would typically: >> summarise the “so what” not just “what happened.” >> track performance vs. targets: Revenue, Margin, Cost, Cash. >> flag risks and opportunities early, not after damage is done. >> simplify complex trends with visuals, charts, and KPIs that matter. >> tie finance to operations, sales trends, customer insights, efficiency levers. >> enforce accountability - tying variance to a clear owner, action, and follow-up. Let me show tweaks I mostly always have to make to MPR reports to make them stand out: 1. Fix your MPR structure: Different strokes for different companies, but your report should typically touch on: a. Executive Summary → Big picture in 1-2 slides b. P&L Performance → Actual vs. Budget/Forecast, Variances c. Revenue Deep Dive → Growth trends, drivers, gaps d. Cost & Efficiency Review → Major movements, savings opportunities e. Gross & Operating Margin trends → Profitability health check f. Cash Flow Snapshot → Liquidity position, cash runway g. Business Unit/Product/Segment Breakdown → Profitability, weak spots h. Risks & Opportunities → What’s changing, what to watch i. Actions & Next Steps → Who’s doing what, by when Some companies include macroeconomic/industry analyses. Some don't. Liaise with your CFO on preference(s). 2. Analyse and explain variances the right way: ALWAYS use the “What → Why → What Next” model. For MAJOR variance(s), answer: >> What happened? >> Why did it happen? >> What does it mean for the business? >> What next? 3. Use root cause categories: When explaining your why, always tag to a root cause. Volume → units sold/used Price → Change in selling price or cost per unit Mix → Different product/service/customer segments Volume → units sold or units used Timing → Transaction moved across periods One-Off → Unusual, non-recurring items These are your storytelling building blocks 4. Tie it to business impact. Aim to answer these questions: >> Are we tracking to plan or drifting off? >> Will this variance affect future months or is it one-off? >> Are any corrective actions needed now? >> Is this good news we should build on? This is where FP&A becomes strategic. 5. Close With Forward Guidance Always end with what’s next: >> Are we revising forecasts? >> What risks remain? >> What are we watching? If you can show the rolling forecast, "kundus for you"! Do these things, and thank me next month after your CFO calls you "Odogwu" 🌚 #FPATuesday