Why Variances and Debt Service Matter for Your Small Business
Ever wonder why your bank account doesn’t always match your expectations, or why some payments seem to “disappear” from your reports? Understanding two fundamental accounting concepts: variances and debt service, can be the difference between a business that survives and one that thrives.
What Is a Variance?
At its simplest, a variance is just the difference between one number and another. In the world of business, it is usually the gap between what you thought was going to happen (your budget) and what actually happened (your actual results).
You might see variances in several areas:
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Revenue and Expenses: Are you earning or spending more than planned?
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Time and Hours: Is a project taking longer than you estimated?
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Quantities: Are you selling more or fewer units than predicted?
Why Variances Matter
Sometimes, a variance is just a “one-time” fluke, like an unforeseen event that will never happen again. Those are easy to explain. However, other times, a variance reveals a fault in your thinking or your assumptions. By adjusting those assumptions, you can reduce future gaps and improve your overall business performance.
Understanding Debt Service
Debt service is the actual cash you pay to lenders every single month. Just like a homeowner pays a mortgage, a business owner might pay off equipment loans, purchase loans, or lines of credit.
There are two reasons you need to keep a close eye on this:
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The Bottom Line: Every dollar you save by lowering your debt service is a dollar that falls straight to your profit.
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The “Hidden” Cost: Debt service is tricky because it lives in two different places on your financial reports. The interest shows up on your Income Statement, but the principal payment shows up on your Balance Sheet.
If you only look at your Income Statement, you might have an artificially low sense of how much debt you are actually paying. To successfully manage your business, you need to see the full picture of where your money is going.