Driver-based planning, or driver-based modeling, is an approach to financial planning and analysis (FP&A) focused on identifying an organization’s key business and value drivers and then creating business plans and budgets based on these key drivers. They then help develop business acumen, collaboration, and understanding on how those drivers lead to actionable outcomes and results.
In the face of increased market volatility, a fast-changing business environment, and global uncertainty, driver-based planning helps Finance and the business make more proactive, forward-looking decisions and create a more agile organization.
The goal of driver-based planning is to focus business plans on the most critical factors that drive success. It uses financial models to run different scenarios based on these drivers, allowing finance and the business to understand the impact on projected business results. It further connects individual business processes, tactics, and strategies to different sets of financial results and outcomes.
For example, driver-based planning can be useful in the long-range strategic planning process, where Finance needs to project long-term trends for revenues and costs. Key business drivers will also vary based on the industry and company.
Typical key business driver examples include:
• Market size and growth
• Market share
• Number of customers/subscribers
• Net dollar retention rate
• Sales volumes in units
• Customer acquisition costs
• Customer lifetime value
• Average sales price
• Net Promoter Score®
• Churn rate
• Sales pipeline throughput
Driver-based planning can also be applied to detailed financial budgeting for the upcoming fiscal year and in creating rolling forecasts to update budget assumptions. Instead of having the business budget and forecast every single line in their cost center budgets, they can focus on updating key metrics that drive other line items via defined outputs and measurements.
Driver-Based Planning Example
In the example below, we want to understand the number of employees in the cost center and the average annual costs for communications, computers, and office supplies.
From these drivers, we can calculate and forecast annual communication, computer, and office supply costs. Then, when analyzing budget variances, we can understand the true performance drivers behind the variances. In a traditional financial budgeting process, this level of detail is often unavailable. More likely, it’s in disconnected Excel workbooks or other models.
This driver-based planning technique is often used for other areas, such as travel expenses, call center staffing, or building out a regional sales organization.
According to a survey from Gartner, “72% of CFOs want to focus on improving the flexibility of budgeting and forecasting.” Faith Vakil, director, research in the Gartner Finance practice, added: “The pandemic exposed budgeting and forecasting processes that were not able to handle rapid and unpredictable changes in operating conditions.”
This is where driver-based planning is particularly useful. It provides several benefits to help companies prepare forecasts that account for rapid and unpredictable changes.
Sharpened Focused and Precision in Financial Reporting
Driver-based planning improves the accuracy of forecasts because it allows the organization to focus on the data that has the greatest impact on revenue and expenses, such as cost of goods sold.
Being able to sharpen focus solely on those key drivers helps reduce the noise in favor of what matters the most to the business. Finance helps eliminate this noise and can then speak the language of the business. Understanding the business is a top trait of high quality FP&A and finance teams.
Driver-based planning also provides the business with the context behind the numbers. The ability to run scenarios based on key operational drivers adds more background and information to the data, allowing the business and Finance to take a more informed approach to budgeting and forecasting.
Increased Finance and Business Alignment
Driver-based planning unites the business and Finance on a common set of metrics and framework for evaluating the future. For example, finance, marketing, sales, manufacturing, and other teams can all play a role in identifying key drivers within their departments, and they can see the impact of their activities on financial results.
Greater Business Agility
Agility can be hard to achieve with a traditional budgeting and forecasting process. But the cross-functional collaboration that a driver-based system requires gives you greater visibility and transparency about each department’s drivers throughout the planning process.
Driver-based planning is highly valuable in helping business leaders understand their business’s true value and how adjustments can affect the bottom line and future business outcomes. This allows the organization to be ready with a plan of action for several different situations. As a result, you’ll be able to act more quickly and decisively.
Improved Efficiency and Effectiveness
Driver-based planning software saves a lot of time and effort in financial budgeting and forecasting. If you focus on key business drivers rather than line items, you’ll save time during your initial budgeting and during financial forecasting throughout the year.
In addition, instead of spending time on manual and repetitive tasks, you can focus on running more scenarios and analyzing variables to identify elements that have the most impact on financial performance. Balancing and focusing on what matters is where Finance can create tighter bonds with the business.
Adopting driver-based planning isn’t always easy to implement within the company, especially if business leaders are used to traditional line-item budgeting. Following these best practices will help ease some of the roadblocks you might encounter.
Understand Business Goals
An effective driver-based financial modeling process starts with clearly defined business outcomes. Before you start planning, make sure you’re aligned with the company’s qualitative business goals and the company’s direction. This makes it easier for your recommendations and strategies to get buy-in from the business.
Collaborate Across the Organization
To make driver-based planning work, each department needs to identify its key drivers. With cloud-based FP&A software, managers can input drivers directly into the same platform used by Finance. This makes the financial planning process faster and simpler because the drivers are centralized in one place and can be easily modified. That’s in stark contrast to Excel, where cross-functional collaboration is more difficult due to emailed files, version control, and more.
Keep It Simple
Every company and industry is different, so there is no widely accepted proper number of drivers to use in planning models. An organization can have hundreds of business drivers across departments. However, limiting the number of drivers makes managing financial models more effortless and efficient.
A rule of thumb is to apply the Pareto Principle: 80% of performance is generated by 20% of drivers. So find 10 to 20 drivers that have a major impact on profitability and focus primarily on those when developing models. Too often businesses and teams want to measure everything yet don’t measure the right things. Try to simplify to just 3 to 6 key metrics.
Regardless of your industry or business model, Planful’s cloud FP&A platform allows you to quickly build financial models and calculations and then choose the best course of action that optimizes your business results. Planful helps you:
• Quickly and easily assess the impact of key variables on your business plans.
• Change inputs and watch the models calculate the new results in real time.
• Connect models to see how adjustments to one model affect your bottom line.
• Choose from a robust library of reporting formats and delivery options to analyze and share your results.
Make forecasting, budgeting, and planning a team sport with strong business collaboration and by connecting the business to insights that matter.
Connect with us to learn more about how Planful can support driver-based planning in your organization.