The traditional budgeting and forecasting planning processes can be long and painful. Any number of issues can arise that render forecasts or the line items on an annual budget quickly outdated. Shifting market conditions or bad assumptions drawn from historical data can leave business leaders struggling to make the right decisions. The problems that occur downstream from inaccurate or incomplete plans and budgets ultimately impact financial performance and long-term success.It’s because of these challenges that many organizations have moved to driver-based budgeting and planning. Driver-based forecasting and business planning identifies key business drivers and creates models around them. These models link to the operating plan and can help predict how an organization will fare when faced with different variables. Driver-based modeling allows finance teams to nimbly adjust resource allocations and fine tune financial forecasting around the core drivers of the business.
Driver-based budgeting definition
Driver-based budgeting/forecasting is a financial planning approach with two major components. The first step in building a driver-based financial model is to identify the key drivers that significantly impact a company's financial performance. The second step is to incorporate these drivers into the heart of the financial planning process.A business' drivers are often specific metrics or variables, such as sales volume, customer acquisition costs, or production capacity. These drivers create more accurate and dynamic budget and forecast models.Driver-based financial planning lets organizations make better-informed decisions, adapt to changing conditions, and achieve alignment between strategic goals and financial plans.
Driver-based budgeting benefits
There are five major advantages of driver-based budgeting and forecasting to consider:
1. Defined drivers
Every business has a few key indicators that give a snapshot of overall performance. A financial model that lets you drill down and focus solely on the most important data helps reduce noise and increase efficiency.Defining your business drivers increases flexibility. Building a budget or forecast around key performance indicators unique to the business will make planning more efficient in the long run.
2. Data integrity
Incorrect numbers or inaccurate forecasts can have a massive trickle-down impact on the bottom line of any business. A driver-based approach enables CFOs to focus on the data that matters most to their organization.Driver-based modeling eliminates extra data and guarantees that your finance team's numbers are a reliable and trusted source of truth.
3. Operational alignment
An organization runs most effectively when information isn’t siloed between departments. It is crucial to get key players from different departments on the same page — from the sales team, to finance, to leadership.A driver-based system by default will have key indicators from each department. Rather than focusing solely on budget inflows and outflows, with a driver-based model department heads can directly report on and improve performance as it ties into operations as a whole.
Businesses want to be able to respond quickly to changes in the market, productivity, and sales. Key decision-makers also want to understand potential challenges and opportunities on the horizon so they can be better prepared.With the traditional budgeting and forecasting approach, agility is hard to achieve. A driver-based system enables CFOs and finance teams to run scenarios and predictive models, preparing the organization with a plan for any change.
Data is king, but too much data can be a problem. Data overload can easily swamp a company's finance team. Accountants and controllers often waste time on budget preparation and data entry instead of focusing on important business models and analyses.With a driver-based system, departmental productivity increases. Employees can focus on important data for decision making, running scenarios, analyzing variables, and contributing to operational strategy.Centage lets you build a driver-based budget model in days. Test multiple scenarios, generate accurate and automated forecasts, and enforce your chart of accounts with our formula-free FP&A software. Book a demo today.