Frame the financial question

Most variance work starts with a loose request: "Why are we over budget?" It sounds clear, but it leaves out several things. Over budget for which month? Against which budget? In which currency? Is the figure in pounds or thousands of pounds? Is the variance actual minus budget, or the other way round?

If you calculate first or prompt an AI tool first, it fills those gaps with guesses. The commentary can then read well and still be wrong.

A framed question states these five things before any figure is calculated:

1. Reporting period: for example a single month, or year to date (YTD, from the start of the financial year to the end of the latest month).
2. Comparison: for example actual versus budget.
3. Currency: for example GBP.
4. Units: units, thousands or millions.
5. Calculation method: how the variance is worked out and signed.

Example: "Why did operating costs for March 2025 (single month) differ from the approved FY2025 budget, in GBP thousands, using variance = actual minus budget?"

This lesson uses a fictional sample company, Northgate Supplies, and its supplied sample tables.

Two mistakes produce a lot of wrong commentary: comparing different periods, and misreading units.

Mixed periods. Northgate's sample tables show March operating costs:

• March actual: £410k
• March budget: £380k
• Q1 year-to-date budget (January to March): £1,140k

Compare March actual with March budget and costs are £30k over budget. Compare March actual with the YTD budget by mistake and costs look £730k under budget. Same data, opposite story. Like must be compared with like: month with month, or YTD with YTD.

Mixed units. The sample P&L shows "410" with a header that says £000. If someone reads it as £410, every figure in the note is out by a factor of a thousand. The same happens when one table is in thousands and another in units.

That is why the framing states the period and units explicitly, and why you check each table's header and column against them before using it.

A variance is the difference between actual and budget. The sign convention is your rule for which number is subtracted from which, and how the result is labelled. State it before calculating, because both versions are in common use.

This course uses: variance = actual minus budget. Variance % = variance ÷ budget × 100.

The label depends on the type of line:

• Revenue lines: a positive variance (more revenue than budget) is favourable. A negative one is adverse.
• Cost lines: a positive variance (more cost than budget) is adverse. A negative one is favourable.

Example: Northgate's March cost of sales is £760k actual against £720k budget. Variance = 760 − 720 = +£40k, which is 5.6% of budget. Because this is a cost line, +£40k is adverse.

If March revenue is £1,250k against a £1,200k budget, the variance is +£50k, which is favourable.

Without this rule written down, a reader might see "+40" on a cost line and assume it is good news. Use the sliders to see how the sign and percentage change.

A variance note that comments on every line buries the important movements. Scope the question to specific lines, or to a materiality threshold: a size of variance you set, at or above which a line gets explained. In this course you choose the threshold to suit your reader and write it in the framing.

Northgate's March sample P&L, in £k, with variance = actual minus budget:

Line	Actual	Budget	Variance
Revenue	1,250	1,200	+50
Cost of sales	760	720	+40
Salaries	210	212	−2
Marketing	48	35	+13
Rent	30	30	0

With a threshold of £10k absolute variance, three lines are in scope: revenue, cost of sales and marketing. Salaries and rent are out of scope.

Notice marketing: only £13k, but 37% over budget. A threshold based only on percentage would also flag it. Choose your rule deliberately, and write down which lines you are leaving out, so a reviewer knows they were considered and not forgotten.

Before you paste anything into an AI tool, decide what is allowed in. In this course the rule is simple: use only the supplied sample tables, in an AI tool your organisation has approved.

Keep these out of unapproved cloud tools:

• Customer identifiers: names, account numbers, invoice references tied to real customers.
• Account credentials: logins, passwords, API keys, bank details.
• Nonpublic reporting information: unpublished results, forecasts or board figures from your own organisation.

The framing block itself is safe to share, because it contains definitions, not data.

Policies differ between organisations. Some allow certain internal data in a specific approved tool, others allow none. Check your organisation's policy before using any AI tool with work material. When in doubt, leave it out and ask.

For Northgate, that means you paste the sample P&L and budget tables and your framing block. You would not paste a real ledger export, even with one or two columns deleted, because identifiers often hide in description fields.

Put everything from this lesson into one short framing block: a few labelled lines you paste at the top of a workpaper or prompt. For Northgate:

• Question: Why did revenue and costs for March 2025 differ from budget?
• Period: March 2025, single month (not YTD)
• Comparison: Actual vs approved FY2025 budget, March column
• Currency and units: GBP, thousands (£k)
• Method: Variance = actual − budget; variance % = variance ÷ budget × 100
• Sign labels: Revenue + = favourable; costs + = adverse
• Scope: Lines with absolute variance ≥ £10k (revenue, cost of sales, marketing)
• Out of scope: Salaries, rent (below threshold)
• Source: Supplied sample P&L and budget only

The value is reuse. The same block heads the calculation in the next lesson, the reviewer's brief and the AI prompt. If the AI tool, your spreadsheet and your reviewer all work from the same definitions, you can check each output against one standard. When a figure in AI commentary does not match the period, units or sign rule in the block, you know straight away that something has gone wrong.

If the framing changes, change the block once and update every place it is used.