How to Write Clear, Actionable Variance Commentary Investors and Boards Trust

How to Explain Budget Variances Worth Investigating

Your monthly budget vs. actuals report is ready, likely pulled from accounting software like QuickBooks or Xero into a spreadsheet. It has 50 lines of data, and a dozen show variances. Now comes the hard part: explaining what happened and why it matters. This is the core of effective variance analysis. For a founder leading finance at a pre-seed to Series B startup, this is more than an accounting exercise. It is about building credibility with your board and truly understanding the levers of your business.

The challenge is translating raw numbers into a clear story, deciding which deviations matter, and linking them to corrective actions. The goal isn't to have zero variance; that's unrealistic. The goal is to have understood variance. This transforms your financial review from a reactive fire drill into a proactive, strategic conversation with investors and stakeholders.

First, Set a Materiality Threshold

Your time is your most limited resource. Combing through every line item that is a dollar off-plan is a poor use of that resource. The first step is to triage, separating the noise from the signal. To do this effectively, you need a materiality threshold, a simple rule to decide which variances are worth your time.

A common starting point for a materiality threshold is any variance greater than +/— 10% AND +/— $10,000. This dual-trigger approach prevents you from chasing a 50% variance on a tiny $500 software subscription. It also ensures a significant but low-percentage overspend on a large budget item like payroll gets noticed. This rule provides a solid baseline for most SaaS or E-commerce businesses.

This threshold, however, must be tailored to your company's stage and specific context. The reality for most pre-seed to Series B startups is more pragmatic. A pre-seed company might set its primary threshold at a $5,000 swing in monthly cash burn, as runway is the most critical metric. In contrast, a Series B company might ignore any variances under $25,000 on operating expenses to focus management attention on more strategic drivers like gross margin or customer acquisition costs.

Beyond the Numbers: Qualitative Filters

Once you have flagged the material variances, apply a second, qualitative filter: is this variance controllable and high-impact? An unexpected rise in bank fees is typically neither. A significant overspend in marketing, however, is both controllable and has a high impact on customer acquisition and cash flow. Focus your energy there.

Also, consider the nature of the variance. Is it a timing issue, like a vendor invoicing a quarter's worth of services in a single month? Or is it a permanent change, such as a key supplier increasing their prices? A timing variance might only need a brief note, while a permanent change requires a deeper explanation and a potential re-forecast. This quick triage should take no more than five to ten minutes and will immediately narrow your list to the few items that truly demand explanation.

A Simple Framework for Actionable Variance Insights: The 3-Part Story

Once you’ve identified a variance that matters, you need a structured way to explain it. Vague notes like “marketing spend was up” are unhelpful and erode trust with your board. They fail to provide context or show that you have a handle on the business. A better approach is a simple, three-part framework that tells a complete story for any variance: What, Why, and So What.

Part 1: The 'What' — Stating the Facts

State what happened clearly and concisely. This is the objective observation, free of interpretation or excuses. Quantify the variance in both absolute dollars and percentage terms to give a complete picture.

For example: “Marketing & Advertising expense was $15,000 over budget (+30%).”

Part 2: The 'Why' — Digging for the Root Cause

This is the most critical part, and it requires digging for the root cause. A vague ‘Why’ (e.g., ‘we spent more on ads’) is not enough. A specific ‘Why’ provides the crucial business context and distinguishes between a strategic decision and an unforeseen problem. To find the true driver, ask diagnostic questions:

• Was this a price variance (e.g., cost-per-click increased) or a volume variance (e.g., we bought more clicks)?
• Was this a one-time event or the start of a new trend?
• Was this an internal decision or driven by an external factor (e.g., a competitor's actions)?

For example: “We capitalized on a 20% drop in cost-per-acquisition (CPA) on LinkedIn for our target developer audience. We reallocated an additional $15,000 to this channel from the Q3 budget to accelerate lead generation while the opportunity was available.”

Part 3: The 'So What' — Defining Next Steps

This part closes the loop, demonstrating accountability and forward-thinking action. It answers the implicit question from stakeholders: “What are the implications, and what happens next?” Your answer should outline specific actions, expected outcomes, and accountable owners.

For example: “This campaign generated 400 MQLs, 50 more than projected, at a lower overall cost-per-lead. The Head of Marketing will present a proposal to adjust the annual marketing budget to reflect this new, more efficient channel mix.”

This “What, Why, So What” structure turns a dry financial variance report into a powerful communication tool. It shows you not only understand the numbers but also the business drivers behind them.

Putting It Into Practice: Financial Variance Report Examples

Theory is one thing; seeing how to explain budget variances in practice is another. Let’s look at common scenarios for early-stage companies and apply the three-part framework. These financial variance report examples show the difference between simply reporting a number and communicating a strategic insight.

Example 1: Negative Expense Variance (SaaS Marketing Overspend)

• Before: “We went over budget on Marketing by $25,000. The team spent more on ads than planned.”
  Annotation: This is a classic founder-led finance comment. It states the 'What' but offers no 'Why' or 'So What'. It prompts more questions than it answers and suggests a lack of control.
• After:
  • What: “Marketing expense was $25,000 over budget (+20%) for the month.”
  • Why: “The overspend was a deliberate decision. Our primary competitor experienced a service outage in the first week of the month. We launched an opportunistic ad campaign on Google targeting their brand keywords, where click-through rates were 3x our average. The entire $25,000 was allocated to this high-conversion campaign.”
  • So What: “The campaign resulted in 35 new enterprise trial sign-ups, a key Q2 objective. Our Head of Sales has confirmed 5 of these have already converted to pipeline opportunities, representing $75,000 in ARR. We are monitoring this cohort closely and will report on the final ROI next month. No further budget action is needed as this was a one-time event.”
  Annotation: This explanation shows strategic thinking. The overspend is framed as an investment with a clear, measurable return. It demonstrates control and an understanding of the competitive landscape.

Example 2: Negative Revenue Variance (E-commerce Sales Miss)

• Before: “Revenue was $40,000 below forecast. Sales were weaker than expected.”
  Annotation: This is a red flag for investors. It lacks specifics, ownership, and a plan for correction. It creates uncertainty about the company's ability to forecast and execute.
• After:
  • What: “Net revenue was $40,000 below our monthly forecast (-15%).”
  • Why: “The miss was driven entirely by our top-selling SKU, the ‘Pro Blender,’ which was out of stock for the last 10 days of the month due to a port delay affecting our primary supplier. All other product lines met or exceeded their sales targets.”
  • So What: “The shipment arrived on the 1st, and all backorders have been fulfilled. The Head of Operations has now secured a secondary supplier in the US for this SKU to mitigate this risk in the future, though at a 5% higher COGS. We have also implemented a new inventory alert in Shopify to trigger re-orders at 45 days of stock instead of 30. We project to recover approximately $20,000 of the deferred revenue in the coming month.”
  Annotation: This provides a specific root cause and demonstrates that the team has already implemented a concrete solution to prevent recurrence. It shows operational maturity and a proactive approach to risk management.

Example 3: Positive Expense Variance (Delayed R&D Hire)

• Before: “R&D salaries were $50,000 under budget. We saved money because the new hire didn't start.”
  Annotation: This comment misses the strategic implication. A positive cash variance can often signal a negative operational development, like a delay in the product roadmap.
• After:
  • What: “R&D salaries and wages were $50,000 under budget for the quarter (-15%).”
  • Why: “The underspend is due to a delayed start date for our Lead AI Engineer, a key hire planned for Q2. The search took longer than anticipated to find a candidate with the right expertise. The successful candidate has accepted and will now start in early Q3.”
  • So What: “While this created a positive short-term cash variance, it delays a key product milestone by an estimated four weeks. The Head of Engineering has adjusted the product roadmap and communicated the new timeline to stakeholders. The budget for this role will shift into subsequent quarters; no change to the annual budget is required.”
  Annotation: This explanation correctly identifies the negative business impact of a "positive" financial variance. It demonstrates a mature understanding that hitting budget is secondary to hitting strategic goals.

Building a Repeatable Process for Stakeholder Variance Communication

Knowing how to write a good variance explanation is useful, but turning it into a sustainable part of your monthly rhythm is what builds a culture of accountability. The key is to decentralize the process. The person running finance, whether a founder or a controller, is responsible for producing the numbers, but they should not be expected to know the ‘Why’ behind every variance. That context lives with the department heads who own the budgets.

From Investigator to Facilitator

A scenario we repeatedly see is finance chasing down department leads via email and Slack a day before the board meeting, leading to rushed, incomplete answers. A better method is a simple, shared template that streamlines commentary collection.

This does not require complex software. A Google Sheet can work perfectly. See our guide on Google Sheet approaches for creating a simple structure for your monthly review:

• Column A: GL Account (e.g., “Software Subscriptions”)
• Column B: Budget Owner (e.g., “Head of Engineering”)
• Column C: Budget ($)
• Column D: Actual ($) (from QuickBooks or Xero)
• Column E: Variance ($)
• Column F: Variance (%)
• Column G: What Happened? (to be filled by owner)
• Column H: Why? (to be filled by owner)
• Column I: So What? (Next Steps) (to be filled by owner)

After your books are closed each month, the finance lead populates columns A through F and flags the material variances. They then share the sheet with the budget owners, who are responsible for completing the final three columns for their respective areas by a set deadline. This approach transforms the finance role from investigator to facilitator. It also embeds financial ownership directly into the leadership team, which is critical for scaling and builds a culture of accountability. For a US company using US GAAP or a UK company on FRS 102, this documented review process also provides a clear audit trail of financial oversight.

Key Takeaways: Turning Variance Analysis into a Strategic Tool

Effectively explaining budget variances to investors and internal stakeholders comes down to discipline, not complexity. You do not need an enterprise-level system; you need a consistent and scalable process. By implementing this approach, you can turn your monthly financial review from a historical report card into a forward-looking strategic tool.

1. Triage First. Define and apply a materiality threshold (e.g., +/— 10% and +/— $10,000) tailored to your startup’s stage. Focus only on the variances that have a meaningful impact on your cash runway and strategic goals.
2. Tell the Full Story. For every material variance, use the “What, Why, So What” framework. Be specific about the root cause and the corrective actions you are taking. This demonstrates control and strategic foresight.
3. Build a Repeatable Process. Use a shared document to collect commentary from budget owners. This shifts the responsibility for the ‘Why’ to those closest to the spend and embeds a culture of financial accountability across the team.

This structured discipline builds trust with your board, empowers your team, and gives you, the founder, a clearer, more actionable understanding of your business. To learn more, continue at the variance analysis hub.

Frequently Asked Questions

Q: What is a "good" level of variance?
A: There is no universal "good" number. The goal is not zero variance, but understood variance. Small variances (e.g., under 5%) are often just noise. Consistently large, unexplained variances are a red flag, suggesting issues with planning or control. A strategic, well-explained overspend can be very positive.

Q: How should I explain a variance if I don't know the root cause yet?
A: Honesty and proactivity are key. State what you know and outline your plan to find the answer. For example: "We are investigating the $15k overspend in cloud hosting. We have a meeting scheduled with the engineering lead to diagnose the driver and will provide a full update by end-of-day."

Q: How does variance commentary differ for internal vs. external stakeholders?
A: The core "What, Why, So What" framework remains the same, but the level of detail may change. Internal commentary for department heads can be more granular and operational. For external stakeholders like a board, focus on the high-level strategic implications, ROI, and impact on key company goals like runway and growth.

Q: How often should we perform detailed variance analysis?
A: For most early-stage startups, a detailed variance analysis should be a core part of your monthly financial closing process. This rhythm ensures that you catch trends early, maintain accountability, and can course-correct quickly, which is crucial when cash runway is paramount.