An ebook for treasury leaders to understand the uses of variance analysis and the best practices to get accurate results.
Variance analysis is a quantitative method of assessing the difference between estimated budgets and actuals. In cash forecasting, variance refers to the difference between a cash forecast and the actual cash position for a particular accounting period. The root cause analysis of the deviation between the forecasts and actuals helps to identify the areas that need correction. It also helps in budgeting accurately, regulating risk, and forward-thinking to implement proactive decisions.
Variance analysis is performed for various reasons such as:
There are numerous applications of variance analysis such as:
Usually, most companies perform variance analysis for business planning and meeting their financial commitments. The finance/ treasury team produces variance reports for certain types of variance and presents them to the treasurers. Some companies only focus on unfavorable variances, while others focus on both favorable (where actual costs are lower than the standard/ projected costs) and unfavorable variances (where actual costs are higher than the standard/ projected costs).
This is a ready-to-use template to calculate variance.
According to the cash forecasting maturity model:
Given the advantages of variance analysis, it is essential to perform it as frequently as possible to increase the cash forecast accuracy and improve cash management.
The best practices for variance analysis are:
Large enterprises usually have loads of cash flow data, making it difficult for treasurers to build low variance forecasts, especially with manual tools such as spreadsheets. The drawback of the manual methods of variance reduction is that they often result in variance with a range of 20-25% and consume a lot of time, effort, and resources. Due to the manual process, the forecasts generated might lose relevance by the time they are sent out to the CFOs since the actual cash position in the bank might be far lower than the projected cash position.
Thus treasurers need to look for robust technologies such as automation solutions to optimize their processes, such as Treasury Management System, Robotic Process Automation, Application Programming Interface, and Artificial intelligence.
Learn about the new treasury technologies and their role in finance management.
AI helps generate low variance forecasts since it automates data gathering by integrating readily with most financial systems. Once the data is extracted, the solution performs a historical analysis and a regression analysis to understand the historical patterns associated with complex cash flow categories such as A/R and A/P and to understand the payment patterns. After the patterns are understood, the system picks an algorithm that can present an accurate cash forecast. To increase the accuracy of the cash forecast by 90-95%, the AI-based application further revises the forecast by:
1. Comparing the forecast to the actuals to check for variance
2. Checking if the AI-designed forecast aligns with the forecasts of other horizons such as monthly, quarterly & yearly
3. Checking if the forecast is accurate across various scenarios
4. Analyzing the accuracy of the cash forecast by doing a line item analysis across multiple horizons
5. Making tweaks into the algorithm through an AI-assisted review process
6. Fine-tune forecast model and enhance data as and when required
7. Rinse and repeat until the forecast accuracy reaches the desired level
AI-based cash forecasting solution supports drilling down into variances across various cash flow categories, geographies, and entity-level variances and performing a root cause analysis. It uses the closed-loop feedback model to reduce the variance eventually by analyzing the historical forecasts and understanding what caused the spike in variance, and improving accordingly. This helps CFOs to get actionable insights to make investment, borrowing, and funding decisions confidently.
HighRadius is a Fintech enterprise Software-as-a-Service (SaaS) company that leverages Artificial Intelligence-based Autonomous Systems to help 600+ industry-leading companies automate their Accounts Receivable and Treasury processes.
The HighRadius® Integrated Receivables platform reduces cycle times in your Order to Cash process through automation of receivables and payments processes across credit, electronic billing and payment processing, cash application, deductions, and collections. The HighRadius® RadiusOne A/R Suite offers a pocket-friendly platform for hundreds of midsized businesses to enable faster A/R processing and enhance their working capital. HighRadius® Treasury Management Applications help teams achieve touchless cash management and accurate cash forecasting.
Powered by the RivanaTM Artificial Intelligence Engine and FreedaTM Digital Assistant for Order to Cash teams, HighRadius enables teams to leverage machine learning to predict future outcomes and automate routine labor-intensive tasks.
Processing over $2.23 Trillion in receivables transactions annually, HighRadius solutions have a proven track record of optimizing cash flow, reducing days sales outstanding (DSO) and bad debt, and increasing operational efficiency so that companies may achieve strong ROI in just a few months. HighRadius is the industry’s most preferred solution for Accounts Receivable & Treasury and has been named a Leader by IDC MarketScape twice in a row.
To learn more, please visit www.highradius.com
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The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.