When should you investigate variances is a massive part of financial management.  it's also this week's I Hate Numbers podcast episode.

If you're thinking, what's a variance, well that's the difference between where you expected to be financially (budget) and where you actually are.  Time, money and your energy is limited so you need to know when it is worth investigating a variance.  This is all part of a system called management by exception, react and correct when things differ from your expectations.

There are five factors for you take on board as to When should you investigate variances.

• Firstly, how large is your variance?   How material is it?  For example, a £100 overspend may be significant to your business, a drop in the ocean to others.
• Secondly, consider controllability.  Can you control this, for example does it arise from external factors, are these fixed costs?
• Thirdly, how accurate and realistic is your Financial Story Plan, Budget as some would call it.  Has there been a conscious effort to accurately forecast resources required?
• Fourthly, cost-benefit.  How much time and money will need to be invested in investigating this variance compared with any potential savings resulting from identifying any underlying problems?
• Finally, consider whether the variance is a one-off or is a pattern and more regular.

Conclusion and good to know

When should you investigate variances is the first step before you dive in to get your insights.  Those insights are showing you how well your financial performance is doing against your financial forecasts.  Knowing when to take a closer look, needs you to have an easy-to-use framework as part of your decision-making process.

The I Hate Numbers podcast covers a range of topics to help serious business owners thrive, let alone survive.  From financial storytelling to tax, and more!  Every episode provides actionable advice from me, business finance coach, accountant and educator. Subscribe to keep in touch, contact me if you want my help for your business

Are you a small business owner, social enterprise or organisation passionate about change? Managing your finances can be a lot of work, trust me.  Finally, there’s software that makes keeping track of your cash flow and financial planning easier: Numbers Know How.

When you are reviewing and monitoring your financial cash plan, your financial story, what do you think the likelihood is that that perception of what the future will hold? That future story plan is going to be 100% accurate? Well, if your answer is 100%, it's going to be incorrect. You are absolutely right.

Every time we look through the windscreen of our business, every time we look into the future and we think what the financial story is going to look like, we are merely basing this on the activities that we undertake. Our perception and our understanding of what is likely to unfold. And it's not a predictive tool to 100% accuracy.

The future is uncertain, knowing what's gonna happen by tomorrow morning. Nobody can guarantee. So what that means is the actual reality of what's going on financially in your business, your business sales, your business costs. The customers that you take on, the investments that you make is not going to match perfectly with what you thought would happen.

And that's fine. That's a natural course of events. The question is, when should you investigate the variances that occur? Now, if you're hearing that word variance and thinking, what is that? I'm gonna explain that further in this week's I Hate Numbers Podcast. And also, I'm gonna throw in another bit of official terminology, but don't worry folks.

I've got my anti jargon ray gun on me. And I'm not gonna overload you with unnecessary jargon.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. Welcome to another weekly episode on I Hate Numbers, the podcast that's got a mission to improve your financial awareness, reduce the anxiety and stress, and the battle between your ears, help you and your business make more money, save time, save tax. What's not to love? My name is Mahmood. I'm a business finance coach and accountant of over 28 years, and I've helped thousands of businesses like yours to achieve their objectives and have the business they want.

Let's crack on with the podcast. Let's get the terminology out the way. Now, I mentioned this word variance earlier on, and a variance is merely the difference between perception, brackets, your plan, and the actual reality of what goes on. So if you anticipate that you'll be spending 5,000 pounds in the month of February, the likelihood is you'll spend less or more than that 5,000 pounds.

The difference based on your accounting records, the data that you capture between what you are actually spending against what you thought you would be spending is a variance. It's a natural course of events. So variances are merely the difference between reality and plans. What we're gonna dive into in a bit more detail through the podcast is when is that point we should investigate?

I wanna introduce another bit of terminology, and it's a system that thousands and millions of companies use throughout the world, and it's called management by exception. Management by exception. I hear you say, what is that all about? If we think in terms of the time commitments we have in our business, the pressure on us to handle a whole wide variety of tasks, from responding to emails, from dealing with staff,

dealing with suppliers, finding new customers, making sure that we've got time ourselves, our time is limited. So management by exception says, once you have a plan established, only investigate deviation from that plan when it's necessary to do so. So if everything is going on course, everything is going according to your plan and what a wonderful situation that is.

Then there's less to worry about. There's nothing to investigate. There's nothing to act on. When things deviate from that plan, either in positive terms, so you make more sales than you expect. You spend less money than you thought you would do, then it's worthy of investigation once you've met certain criteria.

Also, it goes the other way around. If things are going not as well as expected. So there are deviations to the negative. You're spending more, you're selling less. Then you also investigate subject to the criteria. So let's get on with the criteria. Now the first thing we need to consider about when we should investigate variance is how much is involved?

How big is that difference? That is the trigger point. And that difference can be measured in what they call absolute terms. That's the actual pound notes, the dollars, the yen, the currency. So if you anticipate to spend a thousand pounds. And you actually end up spending 1005, you can ask yourself in that context, is a five pound difference material significant enough for you to have an investigation?

Some people like to look at it in terms of percentages, but a note of caution. So if you spend more or less 5% of your budget, you may consider that to be a significant figure to which to investigate the variance. Now a note of caution with percentages. Percentages are what mathematicians call relative numbers.

So if you have a small budget, for example, like 10 pounds and you spend 15 pounds on that particular item, then that's a 50% overspend. However, that's five pounds involved. Now, if it's your personal money, money in your pocket, if it you are anything like me, that's significant. However, in the context of your business, if your business is spending hundreds and thousands of pounds, then five pounds is a relatively small number and it's not worthwhile

to investigate. It doesn't mean we should ignore it completely, but it means our focus should not be on those small trivialities. By all means, have a cursory look, find out what's going on, but in a greater scheme of things, it's neither here nor there. So set your materiality levels. It's quite usual when working with clients that we suggest a control limit - sounds very posh, doesn't it?

So that means if your budget is spent by more or less by X, you substitute that value for X. It could be a hundred pounds, it could be a thousand, it could be 5,000. And also a percentage movement. Having dealt with the size of the variation involved, we then come to look at what's called controllability, another bit of posh language there.

What that means is focus your attention on the areas and the items that you can influence and you can control. So for example, in our cost base, we have some costs that are called fixed. So salary costs, rental costs would be two such examples. Any variation of those spends, obviously it's important to be aware of, but largely in the short term, there's not a great deal we can do to influence that expenditure.

Once you're committed to that spend, it becomes very difficult to change it in a short period of time. Also, when we look at controllability, there may be price movement, for example, that are outside of our control. So if material prices experience a sharp hike, And there's little we can do to control that, and our supplier is one of the few that we can obtain these materials from.

Then again, you know, that might be something that we need to make a note of, need to think in terms of what we can do to mitigate it, but largely it's gonna be an event outside of our control. So we've dealt with the size of the variation, we've dealt with things that we can control. The third factor you should take on board is what's called the trend.

Now, for example, if you've got an overspend or an underspend, if you've got a sales drop or a sales increase, is that an abnormality? Is that a one-off? Is that seasonal? Is it something that's just occurred for the first time? Historically, has it occurred? And that may influence your decision, whether it's worthwhile of investigation.

Remember folks, we've got limited time, so we're trying to focus on those things that ultimately affect the profitability, the sustainability, and the growth of our business. Trivialities, things that don't command our attention immediately are not what we're gonna be looking at. So having dealt with three of those items, what else do we need to think in terms of? Well, the forth thing we should take on board is what's called cost benefit.

So look at the differential between what you are actually spending, for example, and what you thought you would be spending. And what's the cost of investigation rectification? Is there a trade off? In the great seesaw of cost and benefit, benefit should ultimately be at least equivalent to the cost, if not exceed the cost of the variation.

Now, what else do we need to think in terms of, well, I've left this one to last, but also bear in mind the reference point you're looking at, your financial plan, how accurate is it? How old is it? Is it out of date? Have you been updating as you've gone along in light of new current circumstances? If the budget has been extremely optimistic, shall we say, for dramatic cost reductions, big sales increases, but it's not being backed up by action.

You've not implemented any plans there to make them come alive. So if your budget is out of date, if your budget is unreliable, if your budget has been made based on assumptions that are non-existent, then perhaps you need to question the reference point, the budget you are comparing things to. So folks, I hope you found this useful.

So those are five considerations about when you should investigate variances. In future episodes, we're gonna be looking more in terms of how we capture that information. But remember, if you do not have a financial plan, it becomes very difficult to actually monitor, to become accountable, to understand what's going on in your business.

It's absolutely critical that you have a financial story plan. If that's something that you want for your business, if that's something that you need support and assistance on, please check out the show notes, so links, give us a shout, access our Numbers Know How financial platform where you can build your own financial plan and monitor accordingly.

And until next week, happy detective work. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.