# What is Profit and Loss Variance?

Profit and loss variance refers to the difference between the actual profit or loss realized by a business and the expected or budgeted profit or loss. It measures the deviation from the projected financial performance. Positive variance indicates that the business has performed better than anticipated, resulting in higher profit. Conversely, negative variance indicates that the business has underperformed, resulting in a lower profit or even a loss.

# What is the difference between Cash and Accrual?

Profit and loss cash refers to the financial statement method of reporting where revenue is recognized when payment is received, and expenses are recorded when they are paid. This method doesn't take into account any outstanding debts or prepaid expenses.

On the other hand, profit and loss accrual refers to the financial statement method that recognizes revenues when earned and expenses when incurred, even if cash is not received or paid out during this period. This takes into account receivables, payables, and prepaid expenses.

# Why is Profit and Loss Important?

Monitoring your business's profit and loss is crucial for assessing financial performance, managing cash flow, making informed decisions, and comparing your business's performance over time. It provides valuable insights for strategy, pricing, cost management, and resource allocation, ultimately improving profitability and ensuring the long-term success of your business.

# How do I set up this XBert?

From your CONNECT portal, go to the

**Automation**board and click on the third navigation option, '**User Created Types**' on the left-hand side.

Click on either (cash or accrual) '

**Profit and Loss Variance****Rule Detected**' XBert.

Click on

**+Add**to start making your rule.

Here, you can set a name, conditions and actions for the rule you create.

The conditions you can set for your rule include:Account Name

Account Code

Twelve Month Average

Last Month Amount

Prior Month Amount

Variance Percent

Month Count

Once you set a condition, you must select an operator and value.

The operators you can set are:greater than

greater than or equal to

less than

less than or equal to

The value you set is the target our automation will look for depending on the operator you set.

The actions you can set for your rule are:For example, I created a rule to make XBerts for Profit and Loss Variance greater than or equal to 10%.

### How does this work?

Let's consider a practical example to illustrate how variance is determined. Take the case where the average expenditure on contractors over twelve months is 20,000, but in a subsequent month, this cost rises to 22,000. Here, the higher amount of 22,000 is used to calculate the variance compared to the previous month. If the expenditure in the previous month was 24,000, we observe a variance calculated as follows:

The difference between the previous month and the higher value is 2,000 (i.e., 24,000 - 22,000). To find the variance percentage, we divide the difference by the previous month's expenditure: 2,000 / 24,000, resulting in a variance of 8.33% (rounded to two decimal places).

Similarly, if the twelve-month average for salaries is 50,000, yet the subsequent month shows a reduced figure of 45,000, the higher average value of 50,000 is taken as the baseline for variance against the prior month. If the previous month's salary was 63,000, we calculate the variance as follows:

The difference here is 13,000 (i.e., 63,000 - 50,000). Dividing this by the higher average value gives us the variance: 13,000 / 50,000, equating to a variance of 26%.

**It is important to note that variance can also be negative, indicating a decrease in the compared amounts.**