Most finance and accounting teams perform a monthly variance analysis on the income statement. Fewer teams take the time to perform a balance sheet flux analysis. While the benefits of both exercises are ample, a few misconceptions can cause them to be overlooked and performed after month-end close, rather than as part of the close.

Nancy Wu, Head of Sales and Customer Success with SkyStem, recently led a one-hour webinar discussing “The Role Flux and Variance Analysis Play in the Month-End Close.” We recapped the key points below to provide a fresh perspective on why these activities are vital to a successful month-end close.

Let’s quickly review each exercise. The monthly income statement variance analysis most commonly compares current month-to-date and year-to-date performance to the prior year same period and to budget. Taking the time to dig into the variances above a set threshold tells an important story about business performance. Documenting the causes of the variances while the data is fresh helps to capture the best available information. The variance analysis can also detect accounting errors. For example, let’s say payroll expense is 50% lower in the current period than the prior year same period. If performed during month-end close, a quick analytic will call out this anomaly and likely demonstrate that payroll expense was not properly booked for the period. 

In the same way, the balance sheet flux analysis can highlight important trends and themes in current balances compared to comparative balances, whether prior month, prior year-end, or prior year same period. When performed as part of the month-end close, the flux can detect a variety of errors, including those related to misclassification, incomplete data, or oversights. For instance, if a capital lease journal entry was not posted in the current month, the balance would show no change to the prior period, which would raise a red flag for the reviewer.

So, why perform the balance sheet flux and income statement variance analysis during month-end close? Here are two primary reasons: 1) Sharpen your view of business performance and account balances and 2) Detect errors while there’s plenty of time to correct them.

If you are looking for a place to get started, or you would like to improve your current flux and variance analysis, here are a few tips:

1. Start small and contained: The goal isn’t to analyze every change in every account down to individual entries; Pick an appropriate level of detail to start.
2. Create the initial reports: Design one template for your income statement variance analysis and another for your flux analysis; Decide on the appropriate thresholds for each account and the comparative periods that are most relevant to your business.
3. Hold monthly flux meetings: Discuss thresholds and account relationships with your team at the outset and meet monthly to discuss notable variances. 
4. Update the flux and variance analysis: Notate the rationale behind each variance that falls outside the set thresholds.
5. Incorporate feedback: If you find a variance to be caused by an accounting error, be sure to correct the accounting records before the end of close.
6. Seek external input: While many variances can easily be explained by the accounting team, other teams within your organization may have relevant insight to offer. Consider starting with the Sales, Marketing, and Operations teams to hear their perspective of key trends in the business.

During the webinar, Nancy shared a handful of documentation tips to help increase the speed of work. As you begin holding monthly flux meetings, you will naturally discuss the relationship between accounts. Be sure to document the key relationships between accounts as you will come back to these relationships each month. Maintaining a log of internal company events, as well as external events and market-driven changes, will also help pinpoint causes of variances. For example, missing a trade conference that historically boosted sales in prior years would likely be a factor in lower sales in the current month compared to the prior month same period. As you perform the flux and variance analysis each month, build your library of explanations for future reference. You will come back to these resources time and time again.

Automation can help streamline your balance sheet flux and income statement variance analysis. Moving these exercises out of Excel and onto a cloud-based software platform can greatly improve visibility and speed. 

We invite you to join us on March 16 for SkyStem’s upcoming webinar. Nikki Collier, Director of Finance and Accounting for CountryMark, will join Nancy Wu for a discussion about how automation helped their accounting team modernize month-end close: Achieve Total Accountability Through Month-End Close Automation

About SkyStem

Headquartered in the heart of New York City, SkyStem delivers a powerful month-end close solution for organizations seeking to streamline their financial processes. The company’s flagship solution, ART, is an enterprise technology that helps CFOs and Controllers shorten the month-end close and the time to issue financials by automating balance sheet reconciliations, managing month-end tasks, performing flux / P&L variance analysis and providing insightful reporting. The web-based solution streamlines and eliminates up to 90% of manual activities while strengthening internal controls and corporate governance.

Visit https://skystem.com/ to learn more.