“Successful business managers have a plan. Their management reports tell them how they are performing against that plan. Variance analysis enables them to understand WHY their results are different to the planned outcome.”
At the simplest level, variance analysis assesses the difference between actual results and budgeted results. However, when applied to gross profit analysis it provides even more valuable information.
There are many variables that will impact on the dollar amount of gross profit achieved. Firstly, sales volume and gross profit margin levels may differ from those that were planned for. Secondly, the cost of goods/services may vary for a number of reasons. These reasons include changes to materials or labour costs, varying productivity levels, different levels of waste and, in some cases, different yields.
A detailed understanding of gross profit variance is then completed by mix analysis. Mix analysis involves reporting on the effect of selling a proportionally different mix of products and/or selling to a proportionally different mix of customers. It can be used to identify the mix impact of product categories, sales divisions, sales channels or geographic territories.
Armed with this information, management can make smart decisions on immediate actions to improve profit. Over a period of time, the trends from the analysis will guide management to longer term strategies for improving profit.
For those many businesses who do not have the resources or skills to achieve this analysis they should speak to an experienced gross profit consultant who can provide this level of support. The members of the Association of Virtual CFOs is a great place to start if you wish to speak to someone about gaining control of your gross profit margins.