In my previous post on this topic, I covered why planning visualizations are important for an audience of planners without finance backgrounds: they prioritize content and separate the signal from the noise so planners know at a glance what areas of the plan need their attention. Today I'll underline the importance of using the right chart types to tell your plan's story. The idea is that visualizations should enable planners to prioritize the largest areas of their plans and see exactly what parts need adjustment, without forcing them to read anatomically correct financial statements or have a deep understanding of planning terminology.
Particularly, the term "variance" can be incredibly confusing to non-finance department heads who are tasked with managing budgets. Variances of actual spend compared to the budget are either positive or negative, indicating which direction the line item deviates from the plan. In general, being under budget is a positive variance, and being over budget is a negative variance. But things get weird when you're looking at expenses vs. income and it's hard for regular planners to make sense of it all. So the best way I can think of to help non-finance planners understand their plan performance better is to simply use terms like "favorable" and "unfavorable" instead of "positive" and "negative" (i.e. "you've got an unfavorable variance for airfare because of the unplanned training course in Las Vegas that your whole team attended") and to introduce planning visualizations that simplify complex concepts like variances.
Horizontal Bar Graph
A horizontal bar graph with red and green bars is an ideal visualization for a budget statement because it's straightforward and eliminates confusion. In the example here, the budget categories are prioritized from most unfavorable to most favorable. We see that relocation and airline expenses are the most unfavorable – they're the most over budget – and they are emphasized by being in red at the top of the graph. But reallocating funds from the most favorable categories – incentives and salary – can alleviate the problem. Incentives and salary are the most under budget; we've spent less than we've planned and there may be funds that can be moved to the relocation and airfare categories.
Waterfall or Bridge Chart
A bar chart is a great simple visualization, but you can take it to the next level with a waterfall or bridge chart – the epitome of a storytelling visualization for planners. A bridge chart is useful for visualizing the cumulative effect on a cost center or budget as it goes through changes throughout the year. Though income statements make sense for formally trained finance professionals, for most other planning managers they may as well be in Greek. But with a bridge chart, a planner can understand how changes in items like revenue, cost of goods sold (COGS) and operating expenses (OPEX) throughout the year affect the net income. A bridge chart tells a visual story of the starting value, changes to that value, and the ending value for a set period. The chart to the right shows that revenue moved in the right direction more than COGS and OPEX moved in the wrong direction, resulting in increased net income at the end of the period.
In a more advanced variation of the bridge chart, planners can see variances plotted rather than changes from the dollar value perspective. With the second bridge chart pictured here, the starting and ending net income columns remain the same, and deviations from the plan – whether favorable or unfavorable – stem from the horizontal axis. This graph tells us that that there is a favorable revenue since that value has increased in relation to the net income. There is unfavorable COGS, indicated by an increase in that value in relation to the plan, and favorable OPEX since that value has decreased slightly in relation to the plan. Since COGS stands out as most unfavorable, perhaps due to an extreme increase in raw material, increased costs for shipping and handling or perhaps an understated plan for COGS, our planner would need to explore this line item and determine how to minimize these costs.
The concept of variances is hard to grasp, but visualizations with colors that we naturally associate with positive and negative values should help your planners.
So far so good? Hang in there. In my final post in this series I'll explore the charts that help planners forecast how their plans will hold up as the year progresses. Stay tuned!
All of the visualizations in this post were made in arcplan Edge, our budgeting, planning and forecasting solution that includes built-in reporting and dashboards. It's designed to meet the needs of all planners, from FP&A to management to department heads. Learn more >>