HEALTH FINANCE

As managers, you will frequently engage in a practice known as variance analysis. This is where you calculate the percentage of change from one period of time to another (months, quarters, or years). Variance analysis is performed on financial statements and even departmental level budgets. The purpose of conducting a variance analysis is to assess the overall financial health of an organization or department. It will let the entity know how fast it’s growing, if it’s growing at all. It provides management with the information necessary to make business decisions which will ultimately strengthen the financial position of the entity.

The following is a step-by-step set of instructions for performing a variance analysis. For your benefit, an example has been included in each step of the process.

1) Identify the first data point. In this example, let’s assume you’re the CEO of a medical center and you want to compare the “net patient services revenue” from 2011 and 2012. The first data point will be 2011. Now let’s say the net patient service revenue, for 2011, was $50,000,000.

2) Identify the second data point. Following the same example above, your second data point will be 2012. Let’s say that the net patient service revenue, for 2012, was $45,700,000.

3) Now, subtract the first data point from the second data point. In our example, this would be $50,000,000 - $45,700,000, which would equal $4,300,000. This represents the dollar amount of change (or difference) between the two points (2011 and 2012).

4) Divide the change between the two data points by the first data point, and then multiply the result by 100. In our example, $4,300,000/$50,000,000 which comes to “.086”. So, the percentage of variance between 2011 and 2012 is .086 times 100, or 8.6 percent.

THAT’S ALL THERE IS TO IT! Although simple to calculate, it provides management with invaluable information for making operational decisions.