As companies become increasingly sophisticated and highly productive, driver-based planning has become even more impactful. The current fast-changing environment relies heavily on internal and external factors. It is 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.
What is Driver-Based Planning?
Driver-based planning is a system of financial management that focuses on the key components that generate company performance. It identifies what these key business drivers are by using high-quality data, which a financial team gathers from various areas of the business. It also enables the finance team to direct strategic decisions using financial modeling. These models use different sets of possible performance variables to produce highly precise scenario reports.
Therefore, by adopting a driver-focused planning approach, modern companies often outperform their competitors by focusing on their business models and operations towards specific key performance indicators (KPIs).
Some examples of key business drivers include market share, number of clients, revenue per client, sales conversion rates, and customer lifetime value, among many more. Of course, each business is unique and will have different drivers, based on industry, geography, business model, cash flow, and expertise, among other factors.
Is Driver-Based Planning and Forecasting the Best Approach for Your 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 out your finances, one method that is gaining momentum among businesses of all sizes is the driver-based forecasting model.
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. 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 listed the pros and cons commonly associated with this planning approach.
Pros
Improvement of decision-making based on data instead of emotions and assumptions
Greater visibility into the true value of the business
Focus on key metrics that have a direct impact on business performance
Greater predictability and adaptability to changing market conditions
Enablement of cross-functional alignment within the entire company
Quick identification of sources of variability to plan efficiently
Improvements in forecasting accuracy by monitoring in real-time
Clarity and transparency over the entire process while supporting strategic decision-making
Greater scalability with actionable driver-based plans
Cons
Requires a single source of truth (FP&A software) to ensure you have the right set of data
The entire company needs to adjust the focus on a defined set of metrics, which implies a change in the organizational culture
Access to data needs to be easy, so finance teams can develop clear insights into past, current, and future performance
What Are the Benefits of Driver-Based planning for Finance Teams?
There are numerous benefits of using driver-based planning, when executed correctly.
1. True identification of key business drivers
Two or more executives in a business may have very different views of how to measure and interpret performance. As data is at the heart of driver-based planning, there is no room for subjectivity. It produces objective truths about what really matters to business continuity and growth, enabling a company to understand exactly, in granular detail, what and how specific elements drive performance.
As a result, it positions organizations to focus resources on these areas rather than on others which generate poor return on investment.
2. Quick and easy scenario planning
One of the key strengths of driver-based planning is that it equips the financial department to understand what possible scenarios could mean in terms of outcomes for the business. To do so, they simply need to run different variables through their key driver-based modeling system.
As a result of scenario planning, they have relatively effortless and fast data-driven insights, which in turn enables forward-thinking, precise planning as well as the ability to adapt more quickly to unforeseen events.
3. Markedly improved agility and adaptability
In the current unstable global business landscape, companies must be able to adapt quickly. In recent years, companies around the world were caught off guard by a number of extraordinary events, especially the Covid-19 pandemic, the trade tariff war between the United States and China, and more recently, the Russian invasion of Ukraine.
Business continuity in the face of extraordinary events was generally viewed as a low priority. This is no longer the case, with many such events presenting existential threats. Driver-based planning enables greater adaptability and financial agility, as it supports predictive modeling and works in synchronicity with rolling forecasts.
As a result, organizations can better prepare for and respond to unexpected developments compared to when using traditional financial planning methods.
4. Enhances inter-departmental collaboration and alignment
The data that powers driver-based planning comes from all areas of the business, such as the sales and marketing departments. To exploit driver-based planning to its fullest potential, consistent collaboration across departments is critical.
This also positions employees on the finance team to get a much better understanding of the business from the point of view of other departments and it also gives other departments influence in shaping the budgeting plan and capital allocation.
How to Plan with Core Drivers in Mind?
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 the following best practices, you will be able to overcome any hurdles that may come your way.
1. Understand your company’s business goals
Make sure you understand what your company is trying to accomplish, what are the actual goals that are being set, and how success is measured. Consider asking employees, customers, partners, suppliers, investors, and board members about their expectations.
2. Align your financial plan with qualitative business goals
Before reviewing metrics with other stakeholders, be sure that everyone involved in the financial planning process understands how the numbers translate into real value. It is vital to have a clear idea of what you want to accomplish and how you plan to reach those objectives.
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 that everyone’s efforts support the same overarching goal.
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 will give you the power to make decisions about your company’s future.
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 are using revenue as a metric, explain why it matters to the business.
6. Make sure everyone has access to the data they need
If you want people to adopt driver-based planning, then you need to provide them with all the information they need to do their jobs well. This means providing them with the tools they need to analyze the data and create reports. It also means ensuring that the data is accessible in an easily understood format.
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 is going in the future.
8. Provide regular updates
Regularly update the dashboard to keep everyone informed and up-to-date on the progress made towards achieving overall business goals.
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.
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 the Key Drivers in Your Business by Using a 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 is going on in your company by breaking down numbers into meaningful categories. They 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 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.
