As companies become increasingly sophisticated and highly productive, driver-based planning has become even more impactful.
According to a 2015 study by The Hackett Group, 78% of companies rely on driver-based planning, with top performers demonstrating distinct implementation patterns. The current fast-changing environment relies heavily on internal and external factors. It’s therefore important for business leaders to measure these factors to allow them to understand which ones affect their company so they can make better decisions for the future.
Driver-based planning is a management approach that identifies key business drivers and creates a set of plans based on data to help achieve the best results possible for a company.
Today, organizations are trying to find ways to improve the efficiency of their operations. This includes improving the way they forecast sales and expenses. While there are many different methods you could use to plan your finances, one method that’s gaining momentum among businesses of all sizes is the driver-based forecasting model.
Is driver-based planning and forecasting the best approach for your company?
But what are some of the benefits and challenges when trying to implement a driver-based forecasting model? Only 9% of organizations have fully automated driver-based models despite their benefits, primarily due to manual maintenance complexities and integration challenges. Below are the pros and cons commonly associated with this planning approach.
This type of planning and forecasting takes into account how certain activities impact the overall success of an organization. By identifying which influencers affect the ability of the company to make money, you can better predict future revenue and costs with revenue planning. Ultimately, driver-based forecasting helps business leaders understand how changes in each activity can impact the entire company.
But what are some of the benefits and challenges when trying to implement a driver-based forecasting model? Below are the pros and cons commonly associated with this planning approach.
Driver-Based Forecasting vs. Budgeting
Driver-based forecasting focuses on identifying and analyzing key business drivers in real time, while budgeting emphasizes setting fixed financial targets and allocating funds. By comparing both approaches, you’ll gain a deeper understanding of how best to plan for the future.
Internal vs. External Drivers
Various operational and market factors can influence driver-based planning. Internal drivers might include employee performance, production capacity, and organizational structure, while external drivers often involve economic trends, competitive landscapes, and regulatory changes.
Pros
Improves decision-making based on data rather than emotions or assumptions.
Offers greater visibility into the business’s true value.
Focuses on key metrics that directly impact business performance.
Increases predictability and adaptability to changing market conditions.
Enables cross-functional alignment across the entire company.
Quickly identifies sources of variability to plan more efficiently.
Improves forecasting accuracy through real-time monitoring and forecasting approaches.
Creates clarity and transparency over the entire process while supporting strategic decision-making.
Offers greater scalability with actionable driver-based plans.
Cons
Requires a single source of truth, like FP&A software, to ensure you’re working with the right data.
The entire company must focus on a defined set of metrics. It’s a shift in organizational culture.
Data access must be easy so finance teams can develop clear insights into past, current, and future performance.
Steps to Implement Driver-Based Planning
Adopting driver-based financial planning isn’t always easy. You can find several challenges along the way, including resistance from senior management and cross-departmental collaboration issues. However, these challenges shouldn’t stop you from trying to improve your organization’s financial planning processes. By applying these best practices, your finance team can overcome any hurdles that may come your way.
Step 1: Understand your company’s business goals
Make sure you understand what your company’s trying to accomplish, what the actual goals are, and how success is measured. Consider asking employees, customers, partners, suppliers, investors, and board members about their expectations.
Step 2: Align your financial plan with qualitative business goals
Before reviewing metrics with other stakeholders, be sure everyone involved in the financial planning process understands how the numbers translate into real value. It’s vital to have a clear idea of what you want to accomplish and how you plan to reach those objectives.
Step 3: Enable collaboration across departments
Collaboration across departments is essential to making driver-based planning work. Each department must identify the key drivers that affect its performance. Identifying these factors helps ensure everyone’s efforts support the same overarching goal.
Step 4: Determine the metrics that matter most to each department
This process requires a lot of communication between different functions. It also takes time to get buy-in from all stakeholders. After identifying the key performance indicators (KPIs), break them down into key drivers, assumptions, and results in your models. This gives you the power to make decisions about your company’s future.
Step 5: Use a common language
To make driver-based planning easier for everyone involved, use a common language. Everyone should understand the meaning behind the terms used in the financial plan. For example, if you’re using revenue as a metric, explain why it matters to the business.
Step 6: Make sure everyone has access to the data they need
If you want people to adopt driver-based planning, you’ll need to provide them with all the information they need to do their jobs well. This means providing them with the tools to analyze the data and create reports. It also means ensuring the data is accessible in an easily understood format.
Step 7: Create a dashboard
A dashboard is a visual representation of data that shows the status of a business at a glance. A dashboard provides a quick overview of the key drivers affecting the business and allows everyone to see where the company stands today and where it’s going in the future.
Step 8: Provide regular updates
Regularly update the dashboard to keep everyone informed and up-to-date on the progress made toward achieving overall business goals.
Step 9: Be transparent
Be open and honest about the progress and results, even if there are problems or roadblocks. Team members will gain increased confidence in each other’s abilities when they see how everyone works together to overcome obstacles.
Step 10: Keep it simple
Keep the number of metrics low and focus on one or two key drivers at a time. The fewer metrics you measure, the more likely you are to get buy-in from senior management.
Find key drivers in your business using modern FP&A software
Modern finance software is becoming more popular with each passing day. As businesses grow, so does the complexity of reporting. While manual spreadsheets may suffice for small businesses, medium and large enterprises often need to leverage advanced analytics systems that provide real-time visibility into every aspect of their operations.
Modern FP&A tools help make sense of what’s going on in your company by breaking down numbers into meaningful categories. They’ll tell you where to focus your attention for maximum impact and where you should spend time exploring new opportunities. A well-built tool can give you the confidence to make big decisions in challenging circumstances, as well as give you and your team the upper hand when implementing technological trends to stay ahead of your competitors.
Abacum is a collaborative strategic finance FP&A solution designed for finance teams who want to improve their business’s financial performance through a planning process based on accurate drivers.
Request a demo today to find out how Abacum can help you easily identify and prioritize operational drivers across your business to drive growth.
Practical Example of Driver-Based Planning
Imagine a SaaS company aiming to grow its revenue by 20% while reducing churn. Internal drivers include subscription pricing models, new feature releases, and customer support. External drivers involve market demand, competitive pricing, and economic trends. By aligning both sets of drivers, the company can forecast revenue more accurately, fine-tune its customer engagement strategies, and allocate resources effectively.
