Variance Analysis (vs budget and prior year)

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Income statement analysis
Learn how to perform income statement variance analysis versus budget and prior year. Calculate impact on gross profit margin and net profit or EBITDA margin %, using Excel and the example income statement used for analysis in the video.

The analysis of the income statement requires comparing the different line items within a statement (vertical analysis), as well as following trend lines of individual line items over multiple periods (horizontal analysis). The income statement analysis of a business helps understand its ability to earn a profit, and the relationship of its expenses with its sources if income.

I will show you how to answer the most commonly asked questions from financial analysts, accountants and CFOs related to the financial performance of a business when compared to budgeted income statement and prior year income statement. I will show you a method to calculate variances line by line, applying both vertical income statement analysis and horizontal income statement analysis, so that you are easily able to explain the variances in terms of amounts as well as profit percentage.

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How to analyze income statement
Many new analysts and professionals find it hard to explain the drivers of gap vs budget in profit margin % including Gross profit margin (%) and Net Profit margin (%) or EBITDA %, specially when the actual volume of sales is different from budget and prior year. This requires that the analysis splits the impact of change in actual volume on profits and profit % from the impact of other drivers on the profit margin of the business. This helps to perform a thorough p&l analysis so that you are able explain variances in detail.

Comparative income statement analysis
In this video, I will show you, using Microsoft Excel, how you can build a very simple template for yourself, which you can use again and again, whenever the income statement numbers are updated month over month, to show you exactly the impact of variances on profit margin and net profitability of the business, compared to budget and prior year. This is a great financial statement analysis tool to explain the variances from volume changes and variances from other factors, such as price, mix, cost increase/decrease etc.

Hope you find the information in the video helpful. If you like to watch more videos in accounting, financial analysis and controller ship, videos that help you directly in doing your job, subscribe to my channel. If you liked the video, I would love if you could LIKE it and leave a comment. If you have any questions or feedback, again leave a comment. Lets stay connected at #learnaccountingfinance.

[hariszafar]

Awesome explanation. It massively helps me understand analyzing different business units in my organization. Thanks a million

[maakway]

Analysis and interpretation explained very well and helped to understand the variances in a better way. ThankYou.

[mdkvines]

Helped me in corporate interview of Pepsi co. Thanks a lot.

[LearnAccountingFinance]

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[liztrama]

Excellent Video! Your analysis is clear and easy to follow, I just wished you had provided the Excel file, so I can follow and make notes.

[backyardedengardening]

Thanks for your helpful analysis, and willingness to share.

[shajupauljohn]

Excellent video, with a good detailed explanation.

[MichaelHolder]

You imply the full gross margin change is due to changes in the cost lines....but where have you captured the improvement in gross margin attributable to change in price or product mix?

[amiramir-bhdk]

Hi, thanks for the great work. Actual net sales 60, 371 x 1%= 604 vs. budgeted $. So how did you get $734?

[liatbatsrati]

Great ! Very helpfull.dont you take into consuderation the net sales diff on ebitda?

[georgehill]

Is your numbers wrong in the " vs PY $ " column from p12 to p19?? I keep getting 87 for cell P19 & rest of the column is wrong from there down. Just wondering

[isaacsantana]

I've seen some people only do a year-over-year variance analysis or budget vs actual. From an internal control perspective should they be doing both and why?

[carajivgoyal]

Can you please share the excel template

[vinayakg]

Why Budgeted Depreciation and amortization is negative