Accounting

Why You Should Give Two Flux About Flux Analysis

Hey, accountants! FloQast thinks you should give a Flux about Flux Analysis. In fact, you should give two Flux—every month—as in one for the balance sheet and one for the income statement. That’s why we created FloQast Variance Analysis—a better way to Flux.

Before we tell you about this exciting feature, some background is in order.

What Is Flux Analysis in Accounting?

Flux Analysis—short for the stuffier Fluctuation Analysis, and sometimes called Variance Analysis—compares ending account balances for the just-closed period to a given prior period, e.g., Current Month vs. Prior Month. It includes dollar and percentage change—noting items with material differences—and provides written explanations for why the numbers changed.

In a recent FloQast user survey, we were startled to learn that so many teams skip Flux each month. Less than 60% of accounting teams on FloQast do a Balance Sheet Flux as part of their monthly close process. It’s only slightly better for Income Statement Flux: only two-thirds of teams do a monthly check of period-to-period fluctuations in line-item revenues and expenses.

How to Perform Flux Analysis

The flux analysis process might seem complicated at first glance, but it’s actually a straightforward process once you know the steps.

Here’s a simple step-by-step guide to get you started.

Step 1: Select Your Comparison Periods

Choose the two periods that you want to compare. This could be month over month, the current quarter versus the prior quarter, or any other periods that make sense for your analysis.

Step 2: Choose Your Accounts

Decide on which accounts you want to include in your flux analysis. Depending on your focus, you might look at all accounts or a select few line items, such as sales, accounts receivable, or payroll.

Step 3: Calculate the Changes

For each account, calculate the change in dollar amount and the change in percentage from the prior period to the current period.

Step 4: Identify Material Differences

Review the calculated changes and identify any accounts with a large percentage change or one over your materiality threshold. The threshold for what is considered a ‘material’ difference can vary depending on company policy or regulatory requirements.

Step 5: Investigate and Explain Changes

For each account with a material difference, conduct a variance analysis to determine the cause of the change and provide a written explanation. This might involve reviewing transaction details, speaking with relevant colleagues, or analyzing operational data.

If a significant difference is due to accounting errors, you’ll need to flag accounting errors, go back to correct entries in your books, and potentially issue new financial statements. However, the root causes of many variances might be business decisions or market fluctuations. In that case, you can simply note significant variance and write a flux explanation.

Step 6: Review and Analyze the Results

After completing the fluctuation analysis for all accounts, review the results and look for trends, anomalies, or other interesting findings. This step can provide valuable insights into the business and its operations.

Keep in mind that it’s important to be consistent in your approach to flux analysis, as this ensures comparability of results over time.

Flux Analysis Example

Let’s walk through an example with a fictional company, “Bright Future Tech,” to get a hands-on understanding of Flux Analysis. We want to compare the performance of September 2023 with October 2023.

Step 1: Select Your Comparison Periods

The comparison periods chosen are September 2023 and October 2023.

Step 2: Choose Your Accounts

We will analyze the changes in ‘Sales Revenue’ and ‘Operational Costs’ as these are pivotal for understanding the company’s profit dynamics.

Step 3: Calculate the Changes

Suppose in September, the ‘Sales Revenue’ was $500,000, and in October it was $550,000. The dollar change is $550,000 – $500,000 = $50,000. The percentage change is ($50,000/$500,000) * 100% = 10%.

Now, let’s say in September, the ‘Operational Costs’ were $300,000, and in October, they increased to $320,000. The dollar change is $320,000 – $300,000 = $20,000. The percentage change is ($20,000/$300,000) * 100% = 6.67%.

Step 4: Identify Material Differences

The increase in ‘Sales Revenue’ by 10% is significant and worth investigating. The ‘Operational Costs’ also increased by roughly 6.67%, which meets our hypothetical materiality threshold of 5%.

Step 5: Investigate and Explain Changes

Upon investigation, we find that the increase in ‘Sales Revenue’ was due to a successful marketing campaign in October. The increase in ‘Operational Costs’ was due to the hire of extra temporary staff during the same period to handle the increased workload.

Step 6: Review and Analyze the Results

The flux analysis reveals a positive correlation between the increase in ‘Sales Revenue’ and ‘Operational Costs.’ The investment in marketing and additional staff have paid off in terms of increased sales for October.

This example should provide you with a basic idea of how to perform a flux analysis.

Why Is Accounting Flux Analysis Important?

As a best practice, both types of Flux Analysis should be a rote element of every close; most accountants at midsized companies and larger would agree. There are several reasons why:

• During the financial close process, comparing the close period’s ending balances to prior periods is a useful accuracy check during the financial close process. If there’s an abnormal fluctuation, it could just be a symptom of missing data. Better to find and correct those issues early.
• When wrapping up a vetted close process, Flux is a great format to show confirmed variances that highlight material changes in the business.
• Being closest to the overall company numbers, the Accounting team is best positioned to provide on-demand Flux explanations (flux-planations?) of what’s driving any material changes. That gives Accounting a more important ‘seat at the table’ as part of company leadership.

So why is Flux done so spottily? What the Flux is going on here?

In speaking to our users more about Flux, we confirmed our suspicions.

It’s simple, really: it’s a matter of time.

How Long Does it Take to Complete a Flux Analysis?

For most teams, Flux Analysis takes a lot of time. And as if the month-end close isn’t time-crunched enough already, Flux tends to happen last in the process. There’s simply not enough time to do it well, so teams too often don’t do it at all.

While ERPs often include templates that can create a report to compare balances from one period to another, they don’t support a complete Flux Analysis. Most fundamentally, there’s no way to add written explanations in an ERP report. So teams wind up exporting the data to Excel, then manually identifying material fluctuations and adding explanations—when they can.

Moreover, all of that has to wait until all ending balances are locked down, lest the process need to start all over again if any figures have changed.

Sound familiar?

So our FloQast team wondered: can’t there be a better way? Spoiler alert: there is! It’s our new FloQast Variance Analysis module.

FloQast Variance Analysis is different because it’s built right into FloQast, so accounting teams can work on Flux Analysis anytime – including entering explanations text. Material fluctuations are automatically flagged. Balances in Variance Analysis update dynamically in the same way all balances elsewhere in FloQast are updated. So, unlike the old export-and-report method, automation means there’s no worry about needing to start over if any numbers change.

Other key features in FloQast Variance Analysis include:

• Flexible comparison periods, including month-over-month, quarter-over-quarter, and year-over-year comparisons.
• User-set materiality thresholds for Balance Sheet and Income Statement.
• Excel export for sharing Flux outside of FloQast.
• Custom account groupings to enable accounts to be grouped any way your company likes.
• Explanations at individual account and group levels.
• Expand and Collapse views for deep dives into account detail.

During our research and beta periods, we’ve been very gratified and excited by the reception our Variance Analysis module has gotten. We asked several users to score it on a zero to five scale: with zero being ‘nice to have’ and five being a ‘lifesaver’. We knew we were onto something powerful when we heard mostly fours and fives. High five, Flux!

You and your teams, of course, will judge for yourselves.

But we’re confident that if your Flux has run amok, shucks that sucks but you’re in luck.

Interested in seeing FloQast Variance Analysis in action? Schedule a demo today!