Most businesses have a variance sheet that comes out at some interval. It may be your weekly sales reports, P&L statements, updated budgets... well, you get the idea. A fact sheet of numbers that tell you red, or black; making money or losing money. What if I told you that the whopper savings/profit you had this period, which your team was not expecting, is not really a good thing? Of course, being positive or "in the black" far outweighs the shortcomings of a red nothing-but-opportunities report... I would not be a realist if I argued otherwise.

Consider the following... Variances are the summation of numbers that deviate from the standard, or expected, outcomes. If you expected to make $1000 this paycheck, and make $1100, then you are +10% or $100. Likewise if you were (unfavorable), the reverse applies as well.  (Let me call out - if you are making a paycheck where you pay someone pack - we should have another conversation; something around "how to make a resume that sells.") In the business world we can receive a negative balance on the books for a period of time. Based on the budgets or expected cost of materials or services the actual figures were higher or lower than expected. Sometimes the standard is the expected cost for making a material (i.e. manufacturing), and other times its more of a budgeted number created from multiple plans. They are really the same - but a different way of looking at it.

Now, that the framework has been set, let me propose why unexpected swings are not a good thing. The easy answer for a large unexpected unfavorable, or less than standard result, creates a need to offset the number in someway. In your business model that could entail selling more next period, cuttings back on hours, locking spending down for a duration... The bottom line is that a form of recovery has to happen to maintain success. What about - a large profit - or more income than expected based on a budget? The real question is: What would you do up front with the monies you were over - if you knew you would have those resources available? If your company has projections and budgets advertising, new products, seminars, overhead / upkeep - could you have planned investments in advance? If you knew more funds were available for advertising, then wouldn't you have had more marketing budgeted which in turn could drive more sales, and increase the sales? By not knowing what to expect, and playing the lottery every month around your P&L a company becomes reactionary. Your income will be invested for a later date; lost opportunity. Not to mention quarterly predictions to shareholders may come up inaccurate which leads to a weariness to invest.

The problem is variation in the process. Variation leads to inability to accurately gauge results and adjust accordingly. Standards are built based on (supposed to be) a number derived from study, past practice, and capability. By not hitting that number we are disproving the standard. The challenge is how can we move to a process where we can forecast the natural swings in sales, commodity costs, labor, etc.? With accurate planning and anticipation of these occurrences we could invest in growth, marketing spend, debt reduction cutting interest, and accrue for the anticipated lows. With that sort of stability plans can be put into place, vetted, and allow the business to be more agile.

 

photo