Flux analysis accounting, also known as variance analysis, provides insights that help decision makers and department leads understand a company's financial position. As a company grows, it is essential to compare data not only for revenue and expenses, but also for a deeper understanding on an accounting level.
Flux analysis, short for fluctuation analysis, is how executives obtain accounting insights to compare statements, balance, and accounts across a specific period. This data indicates how an organisation is doing and what it could do better.
According to the intended analysis, these reports could be monthly, quarterly or annually. Most analysts run these horizontal analyses for income statement accounts, but they are more valuable when conducting balance sheet forecasting and analyzing balance sheets.
Read on to get a better understanding of your cash position from high-level analysis across the company payroll to what it spends on particular vendors.
A flux analysis is a powerful tool for financial analysts that support a company's financial planning. An effective flux analysis does not stop at reporting numeric differences.
The data is more valuable when you deliver insights into why these variances occur month over month. Therefore, these flux analysis reports should include a brief yet thorough explanation of the material variations.
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An organisation's financials are critical indicators of its overall health. Flux analysis is especially useful for CFOs, finance managers and business heads. Unfortunately, this can be a time-consuming process to conduct regularly.
Flux analysis in accounting can deliver various insights that enable a company to make more informed decisions, such as cash flow allocations or whether it's time to apply for lending services.
Get a sense of how things are operating and a level of operational visibility necessary for driving a successful enterprise. Once you've concluded month-end closing processes, flux analysis reports deliver quality assurance and data accuracy.
These analyses can help flag accounting errors, such as incorrect or missing data. They can also catch inaccurate recorded revenue and expenses and identify potential frauds or losses.
A standard flux analysis compares data, line for line, in a horizontal table or spreadsheet, depending on the length of time. Every column depicts a different week, month, quarter or year (see the example below).
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It takes three distinct steps to conduct flux analysis for accounting. Let's evaluate each step in the process and the importance of each one.
From there, discover how to compare the data, pinpoint the essential insights and get tips on how to report this data most effectively.
Identify the differences between the selected period by subtracting that period from the previous one. If you're trying to understand changes regardless of scale, we recommend finding the percentage change. The formula for this is:
Current Period - Prior Period
/ Prior Period Amount
The account you are analyzing isn't likely to be the same every month. Therefore, you'll need to identify which fluctuations are substantial from those norms.
Consider materiality, whether omitted, misstated or obscured, materials could influence decisions. The significance of these fluxes depends on which accounts it pertains to.
The common materiality threshold is as little as 0.5% to as much as 10%. However, there is no single agreed-upon number.
Source: CFA Journal
Since there is no rule regarding setting a materiality threshold, we recommend using your judgment on which material changes to consider. Account for your organisation's overall revenue and the potential risks or significance of the amounts you are analyzing.
The most critical part of flux analysis accounting is the actual analysis. Explaining fluctuations should do more than determine where they come from. We recommend writing them without industry jargon.
Include details necessary for understanding changes without referencing spreadsheets. This is essential because investors and non-expert business leaders may reference the following:
If you can only attribute a portion of the fluctuation as the specific causes, ensure you include all causes and note the extent of each factor to explain the variance. Diving deeper into your analysis is critical to identify every contributing factor.
Every business should run flux analysis accounting reports for improved business insights and decision making. However, as we stated before, it's a time-consuming process that you must do regularly. Automating this process will save time, money and your most precious resource, the availability of human capital.
At Vena, we offer budget variance analysis software that consolidates spreadsheets to eliminate manually aggregating data. Automatically roll actuals with dynamic Excel templates whether you need to perform actual versus budget or forecast analyses.