Variance commentary examples for management accounts

Short answer: good variance commentary says what moved, against what, why, and whether it will last, in one or two sentences per line. “Revenue was £6,900 (9%) below budget because a £7,500 order slipped into October; excluding it, sales were on budget” explains the variance. “Revenue was 9% below budget” only repeats the report. Explain the overall result and any line above a set threshold (for example 10% and £1,000), largest first.

Variance commentary is the paragraph or two that explains why the numbers in a set of management accounts are different from budget, from last month or from last year. It is often the only part of the pack a busy director reads closely.

Most weak commentary has the same problem: it describes the variance instead of explaining it. “Revenue was 9% below budget” repeats what the report already shows. “Revenue was £6,900 (9%) below budget because the Henderson order slipped into October” tells the reader something they did not know.

This guide gives a simple structure and a set of before-and-after examples. All figures and business names below are invented to show the pattern.

A structure that works

For each variance worth mentioning, cover four things, usually in one or two sentences:

1. What moved, with the amount and the percentage.
2. Against what: budget, last month, or the same month last year.
3. Why, in plain words.
4. So what: is it a one-off, a timing difference, or a trend? Does anything need to happen?

Then order the variances by size or importance, not by their position in the Profit and Loss.

Which variances to explain

Explaining every line produces a wall of text nobody reads. Set a threshold and stick to it, for example any line that is more than 10% and more than £1,000 (or your currency’s equivalent) away from the comparison. Adjust it to the size of the business. Anything below the threshold can go unremarked unless it is part of a trend.

Always explain:

• the overall result (profit or loss) against the comparison;
• any change in gross margin of more than a percentage point or two;
• anything a reader will ask about anyway, such as a large one-off cost.

Revenue

Describes	Explains
Revenue was 9% below budget.	Revenue was £6,900 (9%) below budget, because a £7,500 order for Henderson & Co was delayed to October at the customer’s request. Excluding it, sales were on budget.
Sales increased compared with last month.	Sales rose £7,300 (9.5%) on August, mainly from two new wholesale accounts that started mid-month and are expected to order monthly.
Revenue was down on last year.	Revenue was £4,200 (6%) lower than September last year, which included a one-off fit-out project worth £5,000. Recurring revenue grew 2%.

Gross margin

Describes	Explains
Gross margin decreased to 44.1%.	Gross margin fell from 46.0% to 44.1% after the carrier’s freight increase on 1 September. Customer prices have not yet been updated; a review is planned for November.
Cost of sales was over budget.	Cost of sales was £3,100 over budget, in line with higher sales volumes. Gross margin was 41%, within a point of the budgeted 42%.
Margin improved this month.	Margin improved from 38% to 43%, but August included £2,000 of stock write-offs that did not recur. The underlying margin is about 41%, unchanged.

A fall of a point or two in margin raises the sales needed just to cover overheads. The free break-even calculator shows by how much, which is often worth a line in the commentary when margin moves.

Overheads

Describes	Explains
Wages were over budget.	Wages were £2,100 over budget because of overtime to cover two staff on leave. This should not recur in October.
Software costs increased.	Software costs include £1,200 of annual subscriptions paid upfront in September. The monthly run rate is unchanged.
Rent was higher than last year.	Rent rose £450 a month from 1 July under the lease review, as expected in the budget.

Profit

Describes	Explains
Net profit was below budget.	Net profit was £4,800 against a budget of £9,500. Most of the shortfall is the delayed Henderson order (about £3,000 of profit) and the freight increase (about £1,200).
The business made a loss this month.	The £2,300 loss was expected: September includes the annual insurance premium (£3,600) and is seasonally quiet. Year to date the business is £18,400 in profit, £1,100 ahead of budget.

Cash

Describes	Explains
Cash decreased in the month.	Cash fell £6,700 despite a £7,300 profit, because customers owe £8,400 more than a month ago and the quarterly VAT payment of £5,200 went out.
The bank balance is lower than budget.	Cash is £12,000 below budget, mostly because the new van (£14,500) was bought outright rather than on finance as planned.

Debtors and creditors

Describes	Explains
Debtors have increased.	Customers owed £62,400 at month end, of which £18,700 (30%) was overdue. Three accounts make up £14,000 of the overdue amount and are now being chased weekly.
Creditor days went up.	Creditor days rose from 32 to 41 because two large supplier bills arrived on the last day of the month. Nothing is overdue.

Wording habits

• Use the same comparison all the way through, or say clearly when you switch from budget to last month.
• Prefer “because” to “due to various factors”. If you do not know the reason yet, say so and say when you will.
• Round sensibly. £6,900, not £6,873.41, in commentary; the reports have the exact figures.
• Avoid adjectives that judge. “Disappointing” and “excellent” invite argument. The numbers and the reason are enough.
• Separate timing from trend. Readers act differently on “this will reverse next month” and “this is the new normal”.

Common questions

What is variance commentary? The short written explanation in a set of management accounts of why actual figures differ from a comparison: the budget, last month or the same month last year. The reports show the size of each difference; the commentary gives the reason and says whether it is a one-off, a timing difference or a trend.

How do you write a variance commentary? One or two sentences per variance: the amount and percentage, the comparison, the reason, and what it means. For example: “Wages were £2,100 (10.5%) over budget because of overtime to cover two staff on leave. This should not recur in October.” Start with the overall result, then the other variances in order of size.

What is a favourable and an adverse variance? A favourable variance helps profit and an adverse one hurts it. Sales of £53,000 against a budget of £50,000 is a £3,000 (6%) favourable variance. Wages of £22,100 against a budget of £20,000 is a £2,100 (10.5%) adverse variance, even though the number is higher, because higher costs reduce profit. Say “over” and “under” with the reason rather than relying on the reader to know the sign convention.

How big does a variance need to be to explain? Set a threshold that needs both a percentage and an amount, such as 10% and £1,000. Stationery at £300 against a budget of £150 is 100% over but only £150, so it can go unremarked. Wages £2,100 and 10.5% over passes both tests and needs a sentence. Always explain the overall result and any gross margin move of more than a point or two, whatever the threshold.

Should commentary compare against budget or last month? Against budget if the business has one, because that is the plan the owners agreed. Without a budget, compare with the same month last year for seasonal businesses and with last month otherwise. Pick one main comparison, use it all the way through, and say clearly when you switch.

Getting a first draft faster

The arithmetic part of commentary (what moved, by how much, against what) is mechanical. Our free management accounts commentary generator writes that part from the headline figures you enter, flags the movements a reader is likely to ask about, and leaves the “why” to you. It runs in your browser and nothing is uploaded.

If the same pack goes to a client every month, ReportPilot can send the reports from Xero on schedule, with approval mode so you see each pack before the client does. It asks Xero for read-only access, and there is a 14-day free trial with no card. For budget-based commentary, see also budget vs actual in Xero. For where the commentary sits in a finished pack, see the board report template and adding a cover page and notes to Xero’s Management Report.