Every month, management teams compare actual results with the budget and find variances. Revenue is down 4%, margin is up half a point, net profit is almost on plan. The numbers are accurate and say very little: they show what changed, not why, and so they cannot tell anyone what to do next.

Price-volume-cost (PVC) analysis breaks the deviation into the effects that caused it. It is one of the most useful tools in financial planning and analysis, and one of the simplest.

Five effects behind every result

  • Price: what changes in selling prices did to profit.
  • Volume: the effect of selling more or fewer units, at budgeted margins.
  • Variable cost: what happened to the cost of each unit.
  • Fixed cost and dilution: changes in fixed costs, and how spreading them over more or fewer units moved the margin.
  • Other operating spend: freight, sales and general costs, research and other discretionary items.

The same result, two explanations

Consider a manufacturer whose net profit ended almost exactly on budget. The traditional variance analysis walks line by line through the income statement and suggests that little happened: revenue fell, cost of goods fell with it, and the bottom line held.

Traditional variance analysis: from budgeted to actual net profit, line by line of the income statement.

PVC analysis tells a very different story about the same year. Prices rose strongly, but volume collapsed. Variable costs improved, yet lower volumes left fixed costs spread over fewer units, and that dilution, with higher fixed costs, more than wiped out the gain. Freight costs rose. Lower spending on sales, general costs and research rescued the result.

PVC analysis: the same result explained by price, volume, cost and dilution, grouped into commercial, operational and logistic performance.

Making PVC a monthly routine

  1. Build the bridge at product or customer level, where price and volume are actually decided, and add it up.
  2. Group the effects by owner: commercial for price and volume, operations for cost and dilution, logistics for freight.
  3. Present the bridge first in the management meeting, before any line-by-line detail.

PVC analysis turns financial reporting into a management tool. It replaces the question "why are we off budget?" with a precise answer, and that answer tells each part of the business what to do next.
BS

Bartor S.

Founder

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