Variance analysis of forecasts also important to financial close

BY SID HARRIS, CPA

In his article “Building Blocks of a Successful Financial Close Process” (Dec. 2011, page 18) author Kevin Kelso failed to identify one of the most important aspects of the close process—analysis of variances to budget. He correctly states comparisons should be made with prior periods so that significant variances can be identified and explained. This works well for the balance sheet, which is not usually forecasted, but not for the income statement.

 

Management spends a significant amount of time each year looking forward to create an operating budget so that it may chart the course for the following year. The accounting close process must identify all significant variances to this plan using a preset threshold—either dollars or a percentage—and report them immediately so that management can either correct the root causes of the variances or revise its forward planning. Poor variance analysis allows errors, fraud and operational anomalies to go unreported, uncorrected and unexplained. Auditors’ review of this variance reporting process is critical to their reliance on both the internal controls and the results. As CFO, I always included a review of significant variances to budget in each quarterly review with my auditors. As a crisis management consultant, I have found that comparing the monthly budget to actual analysis is one of the most valuable tools to help me quickly grasp operational status and identify trends.

 

Sid Harris, CPA

Phoenix

 

Author’s reply: Building a successful financial close process is a prerequisite for ensuring accurate and timely management reporting is created for senior management, financial analysts and others responsible for interpreting the overall financial results of the organization. Comparing actual results to budgeted or forecasted results is a standard procedure following the completion of the close process.

 

Although there is no set rule, budget variances should follow after the final results are complete. In larger organizations with multiple divisions or departments, you can waste a lot of time chasing phantom variances that suddenly disappear when an expense allocation or other lagging entry is applied across the organization. Some processes (such as expense and revenue allocations) cannot proceed until the primary units have finished their month-end responsibilities. Obviously, this may not be the case with smaller organizations.

 

However, in every organization it is more productive to hold frequent forecast meetings, particularly toward the end of the month but before the month-end close process begins. The purpose of those forecast meetings is to look at the revenue and expense trends for that month and share information with management about the estimated results compared to the budget. Once the month-end close process is finalized, there should be no surprises.

 

Kevin Kelso

Bear, Del.

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