What-If Calculation

And finance Allah shmoop What is variants Analysis Well basically

it's the fancy business Way to ask Why didn't things

go as expected Or how on Earth are we so

far off Plan plan is the key word You made

a plan a k a Budget Others in the company

rely in your planning and budgeting You know from the

hiring needs of the union factory workers this year to

the marketing spend for TV ads from that department to

the legal team who's fully plumbed up for the eleven

point three lawsuits you expected you'd have to defend this

year But then real life happened and things didn't quite

go as you expected What happened Well they'll figure it

out You're going to use variance analysis And yes it's

a whole science unto itself You own zesty kitty a

leading provider of condiments for pet food You launch a

new Suraj based sauce meant to pair perfectly with the

frozen mice that people feed to there Pet snakes It's

called spicy serpent surprise and cats love it As much

as I know a cat can love anything based on

market research and projections derived from other products you already

sell while you expect sales of three hundred thousand dollars

in the first month and you expect contributed profits from

this product to be one hundred twenty five grand giving

you a contribution margin of about forty two percent Well

a month after launch you look at the numbers you

brought in revenues of four hundred thousand dollars way better

than expected However profits and margins fell meaningful E short

of projections You only brought in one hundred thousand dollars

in contributed profits A contribution margin of just twenty five

percent Well shy of the budgeted forty two percent So

w t f baby Well you run some variance analysis

And as it turns out you had unexpected demand from

Ireland You were pretty sure you'd heard they didn't have

anything left there but oh well additional demand is usually

a good surprise Right That drove your four hundred thousand

over the much less revenue that you originally thought But

the extra demand meant you had to scramble to make

enough spicy serpents Surprised to feel all the orders Well

to do this you had to pay overtime to your

union workers in order to crank out the extra sauce

And that was expensive Now that you know what happened

you can well kind of adjust You know the extra

demand is there so you can hire some additional workers

carefully These new employees will get regular pay and the

additional capacity means you won't have to pay anybody usurious

overtime Since you're not paying the extra labor costs associated

with the overtime well margins will return to the expected

levels Meanwhile you adjust your revenue projections to the new

levels The added demand is still going to be there

next month so you revise your expectations You're going to

make them higher revenues go up So for the second

month you expect to repeat four hundred thousand dollars in

revenue However your labor adjustment should allow margins to get

closer to the originally expected forty two percent which would

give you contribution profits of about one hundred sixty eight

grand Right Well once the month is over you'll look

at the numbers and see if anything else doesn't match

the new budgeted expectations Then you'll run the variance analysis

process again and it becomes part of an ongoing cycle

Basically checking budgets against projections against riel Life results well

When the process is done you'll know whether your projections

were just wrong and need to be adjusted You know

like with the unexpected Irish demand for your new mouse

sauce or you'll find points in the production process and

distribution process and marketing process where your costs went awry

like they were too expensive to get Your stuff shipped

are marketed or placed or put on shelves or whatever

was needed and then you'll adjust You can implement changes

here to get things back to what you predicted Like

when you figured out how the overtime hurt your profit

margins and you brought in new workers overseas likely to

fix the unnecessarily high labor costs Well now thatyou're Suraj

a mouse sauce has taken off You can start your

RND department working on its next big project soy sauce

flavored insects for pets Spiders who