How to make variance reports actionable in your SaaS business

For SaaS businesses, recognizing discrepancies allows teams to pivot, correct, and innovate more responsively. 

Variance analysis and reporting, which is the process of identifying, analyzing, and reporting on the deviations between the projected financials and KPIs and the actual performance achieved, are an important tool for achieving this.

Interpreting variance reports to turn their results into action provides a roadmap to successfully navigate the intricate financial landscape of software subscription models.

With this guide, you’ll learn how to harness the power of variance analysis reports with actionable steps you can use to ferret out insights, find meaning in the numbers, and fix what's broken in your financial strategies. 

It’s time to turn those numbers into action!

Different types of variance that can help you root out hidden issues

Finance teams diving into a variance analysis is not unlike a doctor studying a patient’s vitals and asking deeper about what's going on beneath the surface. Just like a persistent cough might mean more than a simple cold, certain variances hint at deeper operational issues. 

In this section, you’ll find an overview of the different types of variances you might encounter and some of the potential insights they can reveal and which you may need to explore. 

For a deeper dive into the different types of variance, check out our comprehensive guide to “Mastering the variance report: a step-by-step guide for SaaS businesses”. 

Revenue variances

‍These kinds of variances point to differences between actual vs. forecasted revenue.

• Potential insights: If you notice unexpected revenue dips, it might hint at understaffed sales departments, leading to missed opportunities. On the other hand, if the variance report shows an uptick in revenue that is not proportional to an increase in sales staff, it could indicate inefficiencies like overstaffing.

Cost variances

Budget variances highlight the differences between actual vs. planned costs.

• Potential insights: A closer look at the cost variances can expose inefficiencies, such as the ineffective utilization of resources. If your expenditures are escalating without a corresponding rise in output or quality, there might be wastage or misuse of tools and assets.

Variances in customer acquisition and retention metrics

‍These types of variance capture any differences in the actual vs. projected number of new customers acquired and retained.

• Potential insights: Variances in customer retention can flag issues like poor onboarding processes. A spike in customer acquisition cost (CAC) without a subsequent increase in customer retention may signal a leaky bucket in which you're onboarding clients, but they're churning out too soon.

User engagement and satisfaction variances

These types of variances indicate changes in how actively users interact with your software and their satisfaction levels.

• Potential insights: Declining user engagement or satisfaction scores can point toward problems like slow customer support response times or general customer support inefficiencies. If users aren't engaging as expected or express dissatisfaction, they might encounter challenges that aren't promptly addressed.

Interpreting variance report results is essential to truly understand the narrative behind the numbers. As you begin to understand what is driving these variances, you can start putting  together a more comprehensive picture of your operations.

Key elements of actionable variance reports

Variance reports offer great insights that can help you improve your business, that is, if you actually use them. 

Effective communication is essential when it comes to explaining variance, and this requires knowing your audience when sharing findings. For example, internal teams might need granular details for operational tweaks, but when reporting to the board or investors, focus on what they care about, which is typically revenue and cash. 

This targeted approach ensures you're not just collecting data but utilizing it effectively to make more impactful business decisions.

At the end of the day, company leaders, boards, and investors care about three big things: Are my costs low? Is my revenue growing? And, is my cash stable?

SaaS companies can to make their variance reports actionable by: 

• Identifying areas that require attention, either for concern or for potential growth. 
• Making data-driven decisions based on your analysis, making sure you're acting on concrete insights rather than hunches. 

For a variance report to be truly actionable, it must adhere to some foundational principles. Let's delve into the elements that set the bar for effective variance reporting: 

1. Clear and concise data presentation: It's not just about what the data says but how it's presented. Present all data but emphasize major variances in revenue, costs, and other key metrics relevant to your SaaS business at that time. Clarity and precision in how you showcase your numbers and effective visualizations allow for quick comprehension and efficient decision-making.
2. Actual vs. budgeted performance: Comparison is at the heart of a variance reporting. Variance reports identify the differences between projected outcomes and actual results. This comparison offers a lens into areas of high achievement, potential risks, and opportunities for course correction.
3. Identification of key variance drivers: Making a variance report actionable hinges on pinpointing what's driving the changes. It's not just about spotting the variance; it's about understanding the “why” behind it. To navigate these waters effectively, you need to look at your data at a very granular level. 

How to turn variance report insights into transformative action

Once you have the variance report, you are able to think more strategically in terms of reducing the variances identified. In our example above, you discovered a new competitor is eating into your market share, luring potential customers away with its own freemium plan. How will you respond? 

Acting on the insights that variance reporting reveals may involve reallocating resources, revising strategies, initiating new projects, or some combination of these. 

The following steps will enable you to identify areas of concern and chart a course for continual improvement, ensuring your organization remains agile and efficient. 

1. Conduct a thorough analysis of the variances

Variance is important because of its potential to guide and inform. Once the key drivers of a variance are known, the next critical step is to perform a root-cause analysis.

A root-cause analysis delves deep into the “why” behind a variance, making sure businesses don't merely react to numbers but understand the stories and challenges those numbers reflect.

The objective is to pinpoint the actual reasons behind deviations, empowering businesses to address them at their source.

How to perform a root-cause analysis

Begin by dividing the variance up into its primary components. From there, you question each element. 

Has a particular aspect of your business shifted? Are there external market factors at play? Are technological challenges affecting the output? Each query should drive you closer to the root cause, unmasking the underlying reasons for the variance. 

Let's take the monthly recurring revenue (MRR) growth rate. Say it has seen an unexpected dip. Start with the basic components: new MRR, expansion MRR, contraction MRR, and churned MRR.

If the dip is driven primarily by an increase in churned MRR, then the immediate focus is on customer retention. You'll have to delve deeper.  

Are customers churning from a particular pricing tier more than others? Are certain regions facing higher churn rates? Answering these questions could lead to insights about product satisfaction, market competition, or even customer support efficiency.

By deconstructing the variance and meticulously examining each layer, businesses can make sure they're not just reacting to numbers but proactively addressing the real challenges that lie beneath. 

2. Prioritize the variances based on their impact and what you can actually control

Not all discrepancies are equal. When taking corrective actions, it's vital to discern which variances merit immediate attention and which ones require a strategic wait-and-see approach.

Prioritizing variances is much like triage in the world of medicine—addressing the most critical and impactful cases first.

Determine the relative impact of your variances

Start by gauging the relative impact of different variances. A high percentage in a low-dollar amount might grab your attention. Still, it could be overshadowed by a seemingly modest percentage variance in a high-dollar account.

Balance both the proportional variance and the actual financial magnitude of that difference to understand its true impact on your business.

Identify what drivers are within your ability to control 

Understanding a variance is one thing; having the power to amend it is another. After diagnosing the “what” and “why” of a variance, evaluate your sphere of influence. Can you amend a particular process, or is the variance a result of external market forces? 

It's important to differentiate between the controllable and uncontrollable. Efforts are best channeled where they can make a tangible difference. If a variance is anchored in factors beyond your reach, acknowledge it and pivot your energy toward those you can impact.

Create an action plan

With your variances prioritized, it's time to strategize. Develop an action plan tailored to the  nature and magnitude of each variance. For unfavorable variances, this might involve mitigation strategies or process overhauls. Conversely, favorable variances offer a chance to amplify what activities are working and turning those into standard practices.

3. Set clear goals and benchmarks for each variance you plan to tackle

Acting on variances without a clear roadmap can be similar to setting sail without a compass—you might move, but not necessarily in the right direction. Establishing precise goals and benchmarks makes sure corrective actions are both targeted and measurable.

Benchmarks act as the North Star when evaluating variance. They help businesses answer the question of how much variance is too much variance and can help them know when they're on track or when a pivot in strategy is in order. 

Collaborative communication is also essential. Variance can often be the result of multiple, interrelated drivers, which makes cross-departmental collaboration crucial to reducing it.

For instance, a variance in sales figures could be intricately tied to marketing efforts, customer support feedback, or even product development.

Fostering open communication channels and obtaining departmental buy-in becomes essential. Only with collective insight and effort can a business address the root causes and effectively move the needle on variances. 

4. Assign responsibilities and follow up on actions 

While identifying variances is a significant first step, ensuring meaningful, actionable responses is where the rubber meets the road. This is a collective journey, one that demands a clear delineation of responsibilities and rigorous follow-up. 

Understanding the role of the CFO and finance team

The CFO and the finance team are at the forefront of identifying the actions needed to reduce variance. They are the first to detect the ripples of variance. However, their role involves more than just pinpointing variance. They dig deep to unearth the root causes and assess the potential ramifications each variance has for the business.

Engaging company leadership

Once the nuances of variances are decoded, the CFO steps into the strategic realm. They engage with other CXOs, providing them a clear breakdown of which variances could redefine the business trajectory. This involves highlighting threats from unfavorable variances and showcasing opportunities revealed in the favorable ones. 

Empowering teams to act

While the company leadership strategizes, ground-level execution rests with the individual teams or departments. They are the doers, turning insights into actions.

Whether it's the marketing team amplifying a campaign that's yielding favorable results or the operations team recalibrating processes to mitigate costs, each department plays a vital role.

Linking actions to KPIs

To make sure these actions aren't mere shots in the dark, they must be intricately tied to measurable outcomes—the key performance indicators (KPIs). It's not just about acting but acting with a clear vision of desired outcomes.

By aligning variances with departmental KPIs, you gain clarity, focus, and a way to measure success. It is the responsibility of the company’s leadership to mandate this alignment and ensure each measure taken is purposeful and results-driven.

5. Monitor and track progress of the actions you’ve decided to take

Implementation is just the beginning. Post-implementation monitoring and tracking is necessary to understand the real impact of the changes and ensure continuous improvement. Purpose-built financial planning and analysis (FP&A) software can be invaluable here, offering dynamic tracking capabilities to assess the effectiveness of changes and tweak strategies accordingly.

In addition, monitoring builds a sense of accountability. When teams know they're accountable for results, they push harder, always aiming to top their previous best. 

Monthly vs. quarterly tracking

Every business is unique. While some might find monthly tracking to fit their needs, capturing every minor shift and allowing for agile maneuvers, it's not a one-size-fits-all. Sometimes, the ripple effects of a decision or action might take more than a month to fully manifest.

Many businesses report quarterly, which is often more manageable especially for finance teams using spreadsheets to do their FP&A. By aligning with the business quarter, teams have a bit more time to conduct the review necessary to determine the sources of variance. 

Quarterly reporting also offers the opportunity to see if actions implemented in response to previous variances have had the intended effects. Sometimes, a bird's-eye view, letting actions fully materialize, offers a clearest view of where you're headed.

Best practices for creating actionable variance reports

Variance reporting isn't just a tool but a compass pointing toward business optimization. The full potential of variance reports lies beyond creating one. It’s about making the report sharp, insightful, and actionable.

Here's a guide on making the most of your variance analysis. Think of these best practices as your toolkit, turning those reports from just “nice-to-know” numbers into strategic insights. 

Regularly review and refine the reporting process 

A static benchmark will soon lose relevance in a dynamic business environment. By periodically reassessing and refining the performance metrics, format, and utility of the reports, you ensure your variance results remain pertinent and actionable for your evolving business goals. 

Determine the frequency and timing of reporting

Establishing a rhythm is crucial. Decide whether monthly, quarterly, or another time frame suits your business needs best. The frequency should align with your business cycle, allowing timely interventions and strategic recalibrations.

Collaborate with different teams and departments

The beauty of a variance analysis report is its objective nature. When you're armed with data-backed insights, the recommended changes aren't personal opinions but fact-driven strategies. This makes it easier for teams to align, knowing that the suggestions stem from an objective analysis.

Use data visualization techniques for better understanding

Often, a visual representation can communicate what pages of numbers can't. Modern FP&A tools can transform raw data into intuitive graphs, charts, and visuals. This makes the variance report definition clearer but also simplifies the process of interpreting and acting upon insights.

Tailor the reports for different stakeholders

Customize the depth, detail, and presentation of your reports based on the audience. While the leadership might require a strategic overview, operational teams can benefit from granular data insights. Numbers alone can be misleading. Ensure that significant variances have explanatory notes for context. This demystifies the data, enabling stakeholders to grasp the meaning in the numbers.

Include historical data to help identify trends

Variance reports aren't just about the present; they're windows to the past and can provide direction for the future. Businesses can discern patterns, cyclical trends, and anomalies by comparing current data with historical metrics. This historical lens can be instrumental in forecasting and strategizing.

Role of technology in variance analysis for SaaS businesses

Variance analysis is like having a map of the vast and complex world of SaaS, with data-driven insights that can guide you straight to the land of efficiency, resource optimization, and customer acquisition/retention. Acting on the insights provided in variance reports unveils a ton of opportunities that SaaS businesses can harness. 

However, when you're analyzing variance, drilling into all the different data sources to analyze variance and to arrive at insights can be very time consuming as many businesses continue to use spreadsheets and manual processes. 

Using a strategic FP&A platform like Drivetrain can be a game-changer, enabling you to quickly gain a clear picture of what is driving variance in your business without all the endless spreadsheets and manual calculations. 

If you’d like to see first hand how easy it can be to uncover the hidden inefficiencies in your business with actionable variance reports, contact us for a demo. We’ll show you how your data can guide you to SaaS success.