Communicate budget variance: The path to strategic action [best practices from FP&A professionals]

Project budget variance reports are invaluable tools, but how to communicate budget variance and turn the information into strategic actions? Budget variance reports’ true worth lies in how the insights they provide are used across the organization. If such insights can’t influence strategic changes, variance reports are limited to control and accountability functions.

To ensure a more meaningful impact, it’s essential to have a management system in place that facilitates proper reporting, allowing FP&A professionals to identify, communicate, and implement strategic changes based on project budget variance analysis. In this article, we’ll explore how to do this effectively, supported by expert insights. We hope these ideas will add value to your process.

How to communicate budget variance into strategic decision making

When we asked professor Robert Kaplan, senior fellow and Marvin Bower professor of leadership development, Emeritus at Harvard Business School, about implementing strategic changes from project budget variance reports, he reminded us of an important fact: There’s a difference between “using budget variances solely for control and accountability versus using variances for learning and improvement.”

While highlighting this difference, Kaplan brought to our attention the study that his colleague Robert Simons carried out with Johnson & Johnson explaining how the managers of that company “use the budget system to force inquiry into the underlying causes of budget variances, looking externally to competitive threats and opportunities both for explanations of budgetary adjustments, and opportunities to reach or exceed budgeted targets for sales and profit growth.”

The Johnson & Johnson case is a good example of how management uses budget variance reports to adjust overall planning. According to Simon’s book “Levers of Control,” Johnsons & Johnson uses an interactive control system to leverage their budget variance reports.

“Periodically, during the year, Johnson & Johnson managers reestimate the predicted effects of competitive tactics and new product roll-outs on their profit plans for the current and following year. They also adjust five and ten year plans. The recurring questions posed by managers are: What has changed since our last forecast, Why? What are we going to do about it?,” explains Simons.

Not all companies use budget variance reports in the same way as Johnson & Johnson does, of course. However, this is a good example to see how to integrate project budget variance reports into strategic decision-making.

Optimize your reporting system

Generally speaking, variances are initially analyzed in operational review meetings. For instance, finance professionals might hold such meetings to address short-term cash flow issues like late payments or treasury operations.

According to Kaplan and Norton’s book “The Premium Execution,” companies hold operational review meetings to monitor and manage short-term financial and operational performance. While these meetings are essential, many companies remain focused solely on addressing immediate issues, without questioning how to adjust their overall strategy. As a result, variance reports often serve merely as control and accountability tools, rather than contributing to strategic decision-making.

To avoid this trap, it is crucial to optimize your reporting system by clearly separating the agendas and participants of different meetings. This allows finance professionals to move from simply discussing numbers at the operational level to communicating insights and driving actions at the strategic one.

To further enhance this aspect, it is crucial to promote collaboration. “By involving the right stakeholders—whether they be finance, operations, or leadership—and fostering collaboration, the organization can make informed decisions that address variances and prevent future issues,” argues Rizwan Khan, Managing Director at RMK Associates.

Before we explore some of the best practices that finance professionals use to identify, communicate, and implement key issues from these reports, it is important to mention that not every single variance requires a strategy-related response.

“Permissible variances exist for all levels of the organization. If the variance is within these permitted deviations, then there will be no response, and the variance may be ignored,” explains Harold Kerzner, Senior Executive Director at International Institute for Learning, in his book “Project Management.”

Similarly, Bonnie Biafore, project management consultant at Montevista Solutions, argues in favor of pushing back on unacceptable variances. “Organizations with a fixed set of green/yellow/red status conditions could be ignoring the project’s business case benefits. The unacceptable variances may be totally acceptable if you compare them to project benefits!,” explains Biafore.

How to identify project budget variances

In order to have meaningful discussions with key stakeholders about budget variances, FP&A professionals need to accurately identify such variances. The following are some of the things you need to do.

Make sure you have the right technology

Having the right software is essential for effectively managing project budget variances. A good project time tracking software solution streamlines the process, offering numerous benefits that can significantly enhance financial oversight and project performance. Here are some key advantages:

• Real-time tracking of project expenses, enabling early detection of budget variances
• Prompt corrective action, preventing cost overruns and ensuring better financial control
• Accurate and up-to-date variance reports that offer key insights into project performance, allowing for informed decision-making
• Identification of patterns in budget deviations, helping companies adjust resource allocation, timelines, or scope to stay aligned with strategic goals
• Automation of tracking and reporting, reducing manual errors and saving time

How Beebole enhances financial oversight and project performance

Beebole is a completely customizable project time tracking tool that can help you take control of your project status, budget, and profitability. With the ability to add both rates and costs, track time as billable and non-billable, and set up your dashboard with the exact reports you need, it’s simple to spot budget variances before they become a major issue or blocker to the project’s completion.

Leverage your cause analysis

Interpreting and analyzing the data is crucial when preparing budget variance reports for operational and strategic meetings. One of the most important tasks at this point is that of understanding why the variance occurred.

“After identifying the causes of budget variances, the first thing I do is a thorough root cause analysis. Understanding why the variance happened is crucial before taking any action. For example, if there’s a spike in personnel costs, I’d look into whether it’s due to unexpected hiring or overtime,” explained Waleed Qasem, head of department and finance manager at Qatar Charity.

Understanding budget variance and its core component is a process that Shwetank Mishra, senior manager of financial planning analysis at Atlas Medical LLC, executes in two steps:

1. Define the variance: Clearly understand the major element of variance, whether it is a deviation from original budget, a trend, or a benchmark.
2. Categorize the variance: Whether it is favorable, unfavorable, significant, or minor and accordingly prioritize the area of importance.

“Focus on root cause analysis like investigating the underlying variances to identify the opportunities to improve,” suggests Mishra.

Prioritize the issues

Once you have identified your budget variances, you need to prioritize them and focus on the most urgent ones so that you can start bringing those issues to both your operational and strategic meetings.

“Not all variances are equally urgent, so I focus on the ones that could have the most significant impact. Then, I collaborate with the relevant teams to come up with a plan. This could involve reallocating resources, adjusting timelines, or even revising the project scope if necessary,” explains Qasem.

Six best practices for reporting and implementing strategic changes from budget variance reports

Finance teams typically report budget variances through a combination of regular reports, meetings, and presentations. Here are some best practices for reporting budget variances and ensuring the insights are implemented effectively at the strategic level.

1. Hold regular variance review meetings with key stakeholders

Reporting insights from variance analysis on a regular basis is crucial to take prompt actions when negative variances pop up. Whether your strategic review meetings happen on a monthly or quarterly basis, the important thing is to be regular about it.

“Set a schedule for regular budget variance reports, whether monthly, quarterly, or aligned with significant project milestones. Timely communication allows for quick adjustments,” explains Charlotte Goldstone, founder at Ocean View Chartered Accountants.

According to Khan, timeliness is critical. “Communicating budget variances promptly allows teams to take action before small issues become larger problems. Establish clear timelines for when variances are reported, ensuring that the right person is informed at the right time,” states Khan.

2. Create appealing reports with executive summaries

Simplified reporting is key when it comes to the presentation and discussion of your project budget variance analysis. Goldstone suggests to keep the following three best practices in mind:

• Use clear and concise language, and present data visually (graphs, charts, dashboards) to make the information easily digestible for non-financial stakeholders.
• Highlight key variances: Focus on the most significant variances that impact strategic objectives.
• Avoid granular details: Don’t overwhelm stakeholders with too much detail.

Khan’s advice is similar and highlights two big mistakes to avoid when discussing variance reports with key stakeholders:

1. Avoid overcomplicating the message with jargon or excessive detail. Ensure that the key points are simplified without losing the essential insights.
2. Use visuals like graphs and charts to make data more digestible, but avoid overdoing it. The goal is to highlight key variances in a way that aids understanding, not overwhelm the recipient with too many visuals.

In “Project Management,” Kerzner also emphasizes how meaningful and concise status reports are one of the best ways of reducing executive meddling on projects. “These types of status reports should be short and concise, containing pertinent information only. Reporting procedures for variance analysis should be as brief as possible. The reason for this is simple: the shorter and more concise the report, the faster that feedback can be generated and responses developed,” argues Kerzner.

3. Customize reports for different stakeholders

It’s important to customize your project budget variance reports to the different participants of both your operational and strategic meetings.

“When it comes to communicating budget variances, I find that clarity and relevance are key. I always furnish the information to the concerned party, whether it’s project managers or the executive team. For example, with project managers, I focus on how the variances impact their specific programs. But when I’m speaking to the management, I emphasize the broader strategic implications,” explains Qasem.

Selecting the appropriate communication channel based on your audience is a key element of the reporting process. “For higher-level executives, a concise report with high-level insights might be appropriate, while detailed financial breakdowns can be reserved for the finance and operational teams. The key is to tailor the message to your audience,” affirms Khan.

4. Provide context and reasons behind variances

One of the most important ways to provide clarity about specific variances consists in offering detailed explanations about their causes. “Provide context behind the variances—whether due to market conditions, operational inefficiencies, or unexpected costs. This helps stakeholders understand the ‘why’ behind the numbers,” suggests Goldstone.

As we saw before, simplified reporting is key. However, providing clarity doesn’t mean omitting deeper explanations when needed. “While it’s important to simplify the message, don’t skip over the analysis. Where necessary, provide a thorough analysis to explain the root causes behind the variance. This helps stakeholders understand the context and make informed decisions,” argues Khan.

5. Include recommendations linked to strategic goals

Being proactive and providing actionable recommendations is one of the best ways in which FP&A professionals can be involved in the decision-making process. After all, reporting variances is not just about reporting numbers but rather about providing suggestions for the course of action.

“I try to be proactive by offering recommendations alongside the data. For instance, if there’s an overspend on materials or activities, I might suggest looking into renegotiating supplier contracts or reallocating funds from less critical areas depending on the situation,” explains Qasem.

As finance professionals become more strategists, sharing project budget variances reports with the executive team offers a great opportunity for proposing solutions that lead to strategic changes. “Propose Solutions! Don’t just report variances; offer actionable recommendations to address them. Whether it’s cost-cutting measures, reallocating resources, or changing operational processes, provide clear next steps,” argues Goldstone.

Furthermore, your insights and recommendations should be tied to your company’s strategic goals. “Tie variances directly to strategic goals, showing how they affect broader objectives, whether positively or negatively. This alignment is crucial for driving strategic decisions,” adds Goldstone.

6. Promote a collaborative culture across your organization

Promoting a collaborative culture where everyone feels responsible for the budget is key. ”When people understand that managing the budget is a shared responsibility, it leads to more proactive and effective management of variances. I remember a particular project where early, open communication allowed us to identify and solve a funding shortfall before it became a real problem,” recalls Qasem.

As we noted earlier, this kind of collaboration helps companies to address variances and prevent future issues. “The individuals involved in addressing budget variances depend largely on the organization’s structure and its decision-making process. However, collaboration is key, regardless of the structure. Everyone involved should have a clear understanding of the identified issues, the impact these variances have, and the potential risks if the same trends continue unchecked,” states Khan.

Embracing a strategic approach to project budget variances

While many companies use project budget variances primarily as tools for control and accountability, leveraging these reports to drive strategic changes presents a significant opportunity to enhance the value of your finance team.

To achieve this, it’s essential to create a management system that allows your finance professionals to effectively communicate and implement strategic changes based on variance reports.

This approach empowers your FP&A team to go beyond merely reporting numbers, enabling them to contribute to meaningful shifts in your company’s strategy. As Professor Kaplan noted, “running interactive meetings about current and forecasted budget shortfalls among the senior executive team is a great role for the Finance organization.”

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Carlos Quintana

Writer specialized in finance, tech and SaaS. Apart from writing, he loves football and cultural walks around Rome.