How to write variance commentary in five steps

Variance commentary only makes sense against something, so choose it deliberately:

• Budget, when the board approved one and tracks against it.
• The same month last year, when the business is seasonal.
• Last month, for trend, especially in costs.

Say which one in every line. "Up £8,000" means nothing until the reader knows on what.

Set a materiality rule and stick to it: for example, anything over 5% and over £5,000, or the three largest by amount. Everything else is noise. A board shown forty variance lines learns to read none of them.

• Favourable: better for profit than the comparison, from more revenue or lower costs.
• Adverse: worse for profit than the comparison, from less revenue or higher costs.

The classic mistake is calling a cost increase "positive" because the number went up. Always think in terms of profit.

This is where most commentary fails. "Costs were higher due to various factors" restates the table. A reason names the cause:

• a price change: "supplier increased prices 6% from 1 March";
• a volume change: "two extra jobs in the month";
• a timing difference: "annual insurance paid in March, budgeted evenly";
• a mix change: "more lower-margin project work";
• a one-off: "£4,200 legal fee on the lease renewal".

If the reason isn't known yet, write that: "not yet explained; we're checking the subcontractor invoices." It is honest and still useful. Then close with an action: one line per variance, or one for the section, on what someone should look at, decide or do.

Before: "Revenue was above budget. Costs were higher than expected due to various factors. EBITDA was below budget."

After:

• "Revenue was £14,000 (3.5%) favourable to budget, from higher private treatment volumes at the Riverside practice."
• "Associate fees were £12,400 (10.4%) adverse. They are a percentage of the associates' gross, so most of this follows the extra revenue; the rest is a locum covering two weeks of leave."
• "Lab fees were £7,100 (22.3%) adverse, mainly a backlog of crown work invoiced in March. This is timing; April should be lower."
• "EBITDA was £8,000 (10.1%) adverse. Worth attention: check whether the locum cover was budgeted, and confirm the lab backlog has cleared."

Staff costs fall inside the materiality rule, so they don't get a line.

[Line] was [amount] ([%]) [favourable/adverse] to [budget / last month / last year], mainly because [reason]. [Action, if any.]

Every blank filled, or the sentence isn't finished.

The method is the same for each comparison, but the reasons differ. Against budget, they are about assumptions: prices, volumes or timing that didn't happen as planned. Against last month, they are about the business: seasonality, a large one-off job, a missed accrual. Against last year, they are about growth and structure: new staff, new products, lost customers. Keep each in its own line; "revenue is up on budget because of seasonality" is one of the quickest ways to lose a finance director's trust.

The mistakes that recur: listing every variance; direction without size; favourable and adverse mislabelled on cost lines; "various factors" and "timing" with no detail; and no action at the end.

The method takes discipline more than time, but the numbers have to be ready first, and most month-end hours go on rebuilding the report before any commentary can start.

Magic MIS drafts variance commentary from the trial balance and the budget, and the AI writes only the words: every figure in a sentence is filled in by the calculation engine from the ledgers, and a person reviews it before it goes anywhere. More examples in the MIS commentary and variance analysis guide.