What is Driver-Based Planning?

A significant shift is happening in Finance when it comes to operational planning. It’s no longer enough to rely solely on historical data to plan for the future. New advancements, like real-time data and automation, are transforming how finance teams approach planning.

Driver-based planning (DBP), 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 creating plans and budgets based on these key drivers.

Driver-based planning models are becoming even more powerful with the integration of predictive analytics and AI, allowing businesses to forecast outcomes more accurately. These models help develop business insight and collaboration and understand how those drivers lead to actionable outcomes and results.

Let’s look at how driver-based planning works, the benefits, and a framework to implement DBP in your organization.

Driver-based planning focuses 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 financial results and outcomes.

With the addition of real-time data and automation, these models can now adapt faster to changing business conditions, improving decision-making accuracy.

For example, driver-based planning can be helpful 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

A driver-based planning model 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 forecasting every line in their cost center budgets, they can focus on updating key metrics that drive other line items via defined outputs and measurements.

With advancements in cloud-based FP&A software, companies can now centralize driver-based models, allowing teams to collaborate in real time and easily update metrics as new data comes in.

Driver-based planning example

We can calculate and forecast annual communication, computer, and office supply costs from these drivers. Then, when analyzing budget variances, we can understand the proper performance drivers behind the variances.

This level of visibility is often missing in disconnected Excel workbooks, but cloud-based platforms now allow for centralization and greater collaboration across departments.

Driver-based financial modeling is often used for other areas, such as travel expenses, call center staffing, or building out a regional sales organization.

7 Steps to implement driver-based planning at your organization

Implementing driver-based planning within an organization involves seven steps. These steps should be integrated into a company’s broader digital and operational planning framework to ensure success.

1. Identify key drivers

The first step is identifying the critical factors or variables impacting the organization’s performance.

These drivers vary depending on the industry, market conditions, and specific business objectives. Common drivers include:

• Sales volume
• Customer acquisition costs
• Production capacity
• Market share

2. Gather data

Once you’ve identified your key drivers, gather relevant data for each driver from various sources and teams within the organization. This may include other departments such as marketing, sales, IT, and operations, to name a few. Anticipate communicating cross-functionally with stakeholders at different levels to get the data for each driver.

The data you gather may include historical performance data, market research, industry benchmarks, and internal operational metrics.

3. Establish relationships across your data

Analyze relationships between the identified drivers and the organization’s financial outcomes.

This involves understanding how changes in each driver affect different aspects of the business, such as revenue, expenses, and profitability. Establishing these cause-and-effect relationships is crucial for building real-time models that accommodate different scenarios.

4. Develop models

Use the gathered data and insights to develop mathematical models or algorithms that quantify the relationships between drivers and financial outcomes.

These models can range from simple linear regressions to more complex multivariate analyses, depending on the complexity of the business and the available data.

5. Validate and refine over time

Validate the accuracy of the models by comparing their predictions to actual performance data.

Refine the models as needed to improve their accuracy and reliability over time. This may involve adjusting assumptions, incorporating new data sources, or fine-tuning the algorithms.

6. Monitor and adjust as needed

Continuously monitor the performance of critical drivers and financial outcomes against the forecasted values. Identify any deviations or discrepancies and take corrective actions as necessary.

This may involve adjusting operational strategies, reallocating resources, or updating forecasting models.

7. Integrate with your organization’s broader planning processes

Encourage organization-wide adoption: Foster a culture of data-driven decision-making and collaboration within the organization.

Encourage stakeholders across different departments to actively participate in the driver-based planning process and contribute their expertise and insights.

By implementing driver-based planning, organizations can improve the accuracy and agility of their financial forecasting processes, enabling them to make more informed decisions and adapt quickly to changing market conditions and business dynamics.

Driver-based planning provides several benefits to help companies prepare forecasts that account for rapid and unpredictable changes. Let’s look at four in detail.

1. Sharpened focus 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 most significant impact on revenue and expenses, such as the 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.

2. Increased finance and business alignment

Driver-based planning unites the business and Finance on a standard 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.

3. Greater business agility

Business agility can be hard to achieve with a traditional budgeting and forecasting process. However, the cross-functional collaboration that a driver-based model requires gives you greater visibility and transparency about each department’s drivers throughout the planning process.

Driver-based planning is 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.

4. Improved efficiency and effectiveness

Driver-based planning software saves a lot of time and effort in financial budgeting and forecasting. Focusing on key business drivers rather than line items will save time during your initial budgeting and 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 impact financial performance most. Balancing and concentrating 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 roadblocks you might encounter.

Understand business goals

An effective driver-based financial modeling process starts with clearly defined business outcomes. Before you start planning, ensure you’re aligned with the company’s qualitative business goals and direction. This makes it easier for your recommendations and strategies to get buy-in from the business.

Collaborate across the organization

Each department needs to identify its key drivers to make driver-based planning work. 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 more straightforward 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.

Encourage user adoption and change management

Implementing a new driver-based planning system requires a cultural shift, especially for teams accustomed to traditional line-item budgeting. Developing a clear change management plan and encouraging cross-functional collaboration is key to long-term success.

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 directly impact 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.

With Planful, you can leverage real-time data, AI, and predictive analytics to make faster, more informed decisions. 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.

Explore our interactive demo to learn more about how Planful can support driver-based planning in your organization.