A Practical Guide to Conducting Variance Analysis in Monthly Financial Reviews

When the month closes, the numbers don’t always tell the full story. You see the revenue, the expenses, the net income, but what you really need to know is where you stayed on track, where you missed, and why.

That’s where variance analysis comes in. Variance analysis turns your monthly review into more than a scoreboard. It helps you uncover the reasons behind the results so you can adjust course, double down on what’s working, and communicate confidently with your team and stakeholders.

This guide walks you through a practical, step-by-step approach to conducting variance analysis. Along the way, you’ll see how to make the process more insightful and efficient by focusing on financial analysis, and how a thoughtful analysis of variance can reveal patterns you might otherwise miss.

What Is Variance Analysis?

At its core, variance analysis compares what you planned (budget or forecast) to what actually happened (actuals). You’re looking for the differences—called variances—and figuring out what caused them.

For example:

• You budgeted $50,000 in marketing spend but actually spent $60,000.
• Or, you forecasted $200,000 in revenue but only booked $180,000.

The numbers don’t just tell you there was a variance; they invite you to dig into why. Did you overspend on a campaign that underperformed? Did a key customer delay payment?

This is why analysis of variance belongs firmly in your monthly reviews; it gives context to the numbers your accounting software spits out.

Why Variance Analysis Matters for Finance Teams

You already have an accounting system keeping the books, producing financial statements, and ensuring compliance. But those reports alone don’t tell you if you’re actually on track strategically, or if the business is veering off course in ways you can still correct.

Here’s what a consistent variance analysis process adds to your toolkit:

• Accountability: Every department can see exactly where they hit or missed the budget, with specifics. This transparency keeps teams aligned and focused on the right goals.
• Trend spotting: A single variance might not mean much, but repeated variances over several months reveal patterns, whether it’s creeping costs, seasonality effects, or revenue slippage.
• Informed decisions: With a clearer understanding of variances, you can make smarter calls about spending, hiring, pricing, and forecasting based on actual performance, not assumptions.
• Investor and stakeholder confidence: When you can explain the drivers behind variances and show a plan to address them, it reassures stakeholders that leadership has control of the business and is making data‑backed decisions.

In short, your books show what happened. Analysis of variance helps you understand why it happened, and what to do next.

Key Types of Variances to Look At

When you sit down for your monthly or quarterly review, there are a few major types of variances that deserve your attention. Breaking them down this way helps you zero in on the most meaningful drivers of performance.

1. Revenue Variance

Did you beat, miss, or hit your top-line revenue?

• Favorable variance: Actual revenue > budget.
• Unfavorable variance: Actual revenue < budget.

Drill into the root cause: was it driven by price changes, sales volume, customer churn, new customer acquisition, or external factors like market conditions? The more granular you get here, the better you can adjust your strategy.

2. Cost of Goods Sold (COGS) Variance

Are you spending more (or less) to deliver your product or service than planned?

Since COGS directly impacts your gross margin, even small variances can have a big effect on profitability. Look at whether higher costs are temporary (like supply chain spikes) or structural.

3. Operating Expense Variance

Did your overhead stay within planned levels?

This includes marketing spend, payroll, rent, software subscriptions, and other operating costs. Break it down further by fixed vs. variable expenses, and identify where overruns are happening and why.

4. Profitability Variance

At the bottom line, is your net income in line with expectations?

Looking at the income statement holistically, then drilling down into individual variances, helps you pinpoint exactly which line items are pulling profits up or dragging them down.

The goal isn’t just to spot where you missed; it’s to build a clear, actionable narrative about what happened, so you can respond in ways that strengthen the business going forward.

A Step-by-Step Approach to Monthly Variance Analysis

Now let’s talk about how to actually do it. Here’s a simple process you can follow every month:

Step 1: Pull Clean Data

Your accounting system (like QuickBooks, Xero, or NetSuite) already has your actuals. Your budget or forecast likely lives in a spreadsheet or planning tool. Make sure both are finalized before you compare.

Step 2: Build a Variance Report

Start with a side-by-side view that shows:

Line Item	Budget	Actual	Variance	% Variance
Revenue	$200K	$180K	-$20K	-10%
COGS	$80K	$85K	+$5K	+6%
……….	…….	……..	……….	…….

The key here isn’t fancy formatting; it’s accuracy and clarity. Tools like Bunker make this easier by pulling your accounting data directly into pre-built variance templates in Google Sheets or Excel, so you don’t have to export and reconcile data manually.

Step 3: Highlight Material Variances

Not every variance deserves your time. Set a threshold; for example, anything over 5% or $5,000 gets flagged for review.

Step 4: Investigate Root Causes

This is where the value comes in. Work with department heads or check supporting transactions to find out what drove each variance.

• Was marketing higher because of an unplanned campaign?
• Was revenue lower due to delayed shipments?
• Were there timing differences, like invoices hitting earlier or later than expected?

Digging into these questions is what transforms a basic report into a true analysis of variance.

Step 5: Document and Communicate

Summarize your findings in a narrative: what went well, what needs corrective action, and what’s the plan moving forward. Then share it with your leadership team or board to keep everyone aligned.

3 Common Pitfalls to Avoid

Even experienced teams can stumble when analyzing variances. Watch out for these:

• Comparing to outdated budgets: If your forecast is stale, your analysis won’t reflect reality.
• Overlooking timing differences: A variance may just be the result of cash flows landing in a different month.
• Ignoring favorable variances: Underspending isn’t always good; it could mean missed opportunities.

Avoiding these mistakes makes your variance analysis sharper and more actionable.

Final Words

At the end of the day, variance analysis gives finance teams the power to explain the story behind the numbers. When you make it a regular part of your monthly reviews and use the right tools to make it efficient, you can turn your data into decisions that move the business forward.

Done well, an effective analysis of variance helps you spend less time untangling spreadsheets and more time focusing on the decisions that truly drive impact.