Most organizations have a general idea of the key drivers of growth in their business. But how many are prepared for fluctuating markets or a dramatic increase in expenses? Without data to back up decisions, it can be difficult to determine the best course of action.
That’s where driver-based planning comes in. Organizations can use drivers to budget faster, gain greater visibility into the business and forecast strategically to mitigate risk. However, many finance teams use spreadsheets for their planning without being fully aware of their inherent limitations. There are broken links, formula errors, data integrity and security issues abound in spreadsheets, so if you are doing serious planning, it is worth evaluating some of the other tools that are available.
With an automated FP&A solution, you can use driver-based planning to its full potential and gain context behind your budgets and forecasts. Read on to learn the benefits of driver-based planning and how your finance team can accelerate growth and profitability in your company.
Driver-based planning is a budgetary method used to make decisions when forming the annual budget and rolling forecasts. The goal is to plan activities that drive business performance by focusing on controllable variables.
Driver-based planning is mainly based on linking the business’ finance-related and non-finance-related activities. The most popular driver-based planning is when variable costs are involved such as:
An FP&A solution can update these variables quickly and accurately, allowing managerial decisions to be made faster. This type of planning also eliminates hit-and-miss practices, as the cause-and-effect relationship is already established when linking drivers to financial outcomes.
Identifying the organization’s main operational drivers or activities enables financial forecasts to be made with more confidence. Better decision-making results from better alignment of decision-makers across the business.
Companies use driver-based planning to:
Using this budgetary method, finance teams can accelerate their planning process in three main areas: improved collaboration, flexibility, and visibility into potential outcomes.
Driver-based planning can be used to show a direct link between financials and operational data. As an example, companies often keep an eye on customer churn to see how it will affect their bottom line. In the example below, we can see that the total number of customers is part of a cycle affecting sales headcount, support headcount, operating expenses and revenue. Using driver-based planning, each of these variables can be adjusted to show the impact on the rest of the cycle, helping executives make better-informed decisions.
Companies performing What-If analysis can better predict and prepare for potential outcomes. Driver-based planning makes What-If analysis easier by showing the impact of financial decisions on other areas of the business. If managers want to know what happens when costs increase, they can build scenarios where they test price changes and see the overall effect on the budget.
Driver-based planning allows teams to forecast and reforecast throughout the fiscal year, leading to better adaptability to trends in the economy. Finance professionals can precisely plan revenue and expenses to make effective decisions such as hiring more staff, downsizing office space and increasing production output. Teams also have the advantage of knowing when finances are healthy and having the confidence that the business can sustain new projects.
Driver-based planning accelerates the budgeting and forecasting process using accurate data available in real-time. Using business drivers to back decisions helps your company sustain growth by providing the ability to rapidly re-forecast and re-engineer the current situation with minimal effort.
While spreadsheets are the tool of choice, they are prone to errors and often take hours or even days to update manually. A financial model that allows for adjustments of key drivers can take days to build in a spreadsheet. Modern cloud FP&A software offers Excel-like features and formulas, making the learning curve short for finance professionals. To get the most out of driver-based planning, companies need a collaborative, integrated platform that delivers immediate access to critical business information.
To see an in-depth video on building a driver-based planning model in a Cloud FP&A solution, watch our video on How to Set Up Driver-Based Budgeting.