A Profit & Loss (P&L) statement is not reviewed in isolation at year-end.Auditors, bankers, and tax authorities analyse it comparatively, focusing on movements, trends, and anomalies.
1. Introduction — Why Variance Analysis Is Critical
Variance analysis answers one central question:
Does the change in profit logically align with business reality?
Unexplained movements signal:
Misstatements
Cut-off errors
Suppressed income or inflated expenses
Unexplained variances often lead to deeper scrutiny, estimated additions, or audit qualifications.
2. Objective
To ensure that at year-end:
Significant year-on-year changes are identified
Variances are explained with evidence
Abnormal trends are corrected or documented
Profit numbers are defensible
3. What Is P&L Variance Analysis?
P&L variance analysis involves:
Comparing current year figures with prior periods
Identifying material increases or decreases
Analysing business, accounting, and compliance reasons
It converts accounting numbers into explainable business outcomes.
4. CABTA Framework — “The 8-Step P&L Variance Review Model”
Step 1 — Revenue Variance Analysis
Analyse:
Turnover growth or decline
Segment-wise performance
One-time or exceptional income
Revenue spikes or drops without explanation are immediate scrutiny triggers.
Step 2 — Gross Profit (GP) Margin Review
Review:
GP percentage movement
Cost of goods sold behaviour
Inventory valuation impact
GP fluctuation is one of the most common reasons for book rejection.
Step 3 — Major Expense Head Review
Focus on:
Salary and wages
Rent
Professional fees
Marketing and selling costs
Repairs and maintenance
Large movements must be logically explained.
Step 4 — Identify New or Missing Expenses
Check for:
New expense heads appearing
Expenses missing compared to prior year
Sudden appearance or disappearance raises red flags.
Step 5 — Other Income & Exceptional Items
Ensure:
Correct classification
Separation of recurring and non-recurring items
Mixing operational and non-operational income distorts analysis.
Step 6 — Expense Ratio Analysis
Analyse:
Expenses as % of turnover
Employee cost ratio
Administrative overhead ratio
Ratio analysis highlights inefficiencies and posting errors.
Step 7 — Link P&L Variances With Balance Sheet
Correlate:
Salary increase vs employee count
Interest cost vs loan balances
Depreciation vs asset additions
Unlinked variances often indicate errors.
Step 8 — Document Variance Explanations
Prepare:
Variance explanation notes
Supporting documents
Management sign-off
Undocumented explanations have no audit or assessment value.
5. Common P&L Red Flags
Sharp GP fluctuations
Excessive miscellaneous expenses
Sudden profit decline without business reason
One-time expenses not disclosed
6. CABTA Insight
“If profit movement cannot be explained, it will be explained by the authority — unfavourably.”