What thresholds should trigger an explanation?

Use two together: a percentage and an absolute amount, and require both to be breached before the item is flagged. Ten percent and an amount near your materiality works for most companies at this size. Percentage alone floods you with small accounts that doubled from nothing; amount alone lets a large account drift quietly.

Compare to last month, last year, or budget?

Prior month catches close errors, which is the point during the close. Prior year catches seasonality and trend, which is the point in a board package. Budget catches decisions, which is the point in a forecast review. Run prior month during the close and add the other two when you are preparing something for an audience.

Who should write the explanation?

The person who owns the account, not the person assembling the package. Finance can draft it, but the owner confirms it, because the causes live in their part of the business. When finance writes all of them alone, the explanations drift toward describing the accounting rather than the business.

How is flux analysis different from a budget variance report?

Flux analysis is a close control: it asks whether the books are right. Budget variance is a management review: it asks whether the plan is holding. They use the same arithmetic and answer different questions, which is why a company with a good variance deck can still be closing badly.

What does an auditor do with flux analysis?

Analytical review is a required audit procedure, and your explanations are the starting point. If yours are specific and supported, the auditor tests a few and moves on. If they are vague, the auditor builds their own expectations and tests transactions, which is slower and more expensive for you.

Can AI write the explanations?

It can draft them from what the ledger shows, which saves the blank page, and it is useful for spotting the movements worth asking about. It cannot know that a customer pulled forward a shipment or that a contractor was reclassified, and a draft that is confidently wrong is worse than no draft. Treat any generated explanation as unconfirmed until the person who owns the account signs it, and keep that distinction visible in the record.

Guide

Flux analysis that explains itself: variance review for a founder-led company

Flux analysis, short for fluctuation analysis, is the step in a close where you compare each account to a prior period or to plan, flag the movements that are large enough to matter, and write down why each one moved. Done well it is the cheapest error detection a company has, because an unexplained swing is usually a missing accrual, a misposting, or a real change in the business that nobody told finance about. The test of a good explanation is simple: it names the cause and the amount, not the direction. "Payroll up $42,000 because two engineers started on the 6th and the annual bonus accrual began this month" is an explanation. "Payroll increased 18 percent" is the number said twice.

By Vanward. Published 2026-09-15. Updated 2026-09-15.

Most companies do some version of this already. Someone opens the profit and loss next to last month, scans for anything that looks off, and asks a question or two in chat. That catches the obvious and misses the rest, and none of it is written down, so the same question gets asked again in three months by someone else.

Set the threshold before you look

Deciding what counts as significant after seeing the numbers is how items get talked past. Set it once, apply it to every account, and let the list be whatever length it is.

Company shape	Percentage	Amount	Typical flagged accounts per month
Pre-revenue, under $250k a month of spend	15%	$10,000	Five to ten, mostly payroll, hosting, and professional fees
Early revenue, $250k to $1M a month	10%	$25,000	Ten to fifteen, revenue and cost of revenue leading
Scaling, over $1M a month	10%	$50,000 or your materiality if you have one	Fifteen to twenty-five, with a balance sheet pass added

Run it on the balance sheet as well as the income statement. Income statement flux finds the missing accrual; balance sheet flux finds the one that was booked twice, the prepaid that never amortized, and the reserve nobody has revisited since it was set.

What a real explanation contains

Three parts, in one or two sentences. Anything longer is a memo, not a flux note.

The cause, named

A person, an event, a contract, a decision. "Two engineers started on the 6th." "The annual insurance premium was paid and is now amortizing." "A customer moved a shipment into September at their request."

The amount attributed to it

If the swing is $42,000 and the two hires explain $28,000, say so and account for the other $14,000. Partial explanations are where errors survive, because the reader assumes the whole movement was covered.

Whether it recurs

One line, and it is the part the board actually reads. A one-time legal bill and a permanent headcount increase look identical in the variance column and mean opposite things for the forecast.

The explanations that cause trouble later

"Timing" with no detail, which is true of almost every variance and tells nobody anything. "Reclass" without saying from what to what, which hides whether the prior period was wrong. "Per management" with no name attached. And the restated number, which is the most common of all: the explanation repeats the movement in words and stops.

Keep the explanation with the period

Flux notes usually live in the tab of a workbook that gets overwritten next month, or in an email thread. Then the auditor asks about March, and March's explanations are gone or have been edited since. The explanation is part of the evidence for the period, and it needs the same treatment as the reconciliation: attached to the step, dated, attributed, and frozen when the period closes.

The same applies to anything drafted rather than written by a person. A draft is a useful starting point and a liability if it is later mistaken for someone's considered judgment. Mark it as drafted until the account owner confirms it, and keep that state on the record rather than in someone's memory.

What this looks like in Vanward

Each close step carries the ledger figure, the supporting figure, and the prior period, so the variance is computed rather than typed, and the step is flagged when it breaches the threshold. The explanation lives on the step with its author and time. A drafted explanation is tagged as AI-generated and stays that way until a person confirms it, which is a visible state and not a footnote. When the period closes, the export carries the explanations, the figures, and the sign-offs together, so the board package and the audit request come out of the same record.

Questions founders ask

What thresholds should trigger an explanation?: Use two together: a percentage and an absolute amount, and require both to be breached before the item is flagged. Ten percent and an amount near your materiality works for most companies at this size. Percentage alone floods you with small accounts that doubled from nothing; amount alone lets a large account drift quietly.
Compare to last month, last year, or budget?: Prior month catches close errors, which is the point during the close. Prior year catches seasonality and trend, which is the point in a board package. Budget catches decisions, which is the point in a forecast review. Run prior month during the close and add the other two when you are preparing something for an audience.
Who should write the explanation?: The person who owns the account, not the person assembling the package. Finance can draft it, but the owner confirms it, because the causes live in their part of the business. When finance writes all of them alone, the explanations drift toward describing the accounting rather than the business.
How is flux analysis different from a budget variance report?: Flux analysis is a close control: it asks whether the books are right. Budget variance is a management review: it asks whether the plan is holding. They use the same arithmetic and answer different questions, which is why a company with a good variance deck can still be closing badly.
What does an auditor do with flux analysis?: Analytical review is a required audit procedure, and your explanations are the starting point. If yours are specific and supported, the auditor tests a few and moves on. If they are vague, the auditor builds their own expectations and tests transactions, which is slower and more expensive for you.
Can AI write the explanations?: It can draft them from what the ledger shows, which saves the blank page, and it is useful for spotting the movements worth asking about. It cannot know that a customer pulled forward a shipment or that a contractor was reclassified, and a draft that is confidently wrong is worse than no draft. Treat any generated explanation as unconfirmed until the person who owns the account signs it, and keep that distinction visible in the record.

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