In a perfect world, budgets would always line up perfectly with actual spending.
As most businesspeople know, this outcome is rarely the case. Even the most strategically-crafted budgets can take hits from unforeseen circumstances.
Expecting that something unexpected will occur throughout the year weakens the argument for creating a traditional budget. But that doesn’t mean that companies should fly by the seats of their budget-less pants.
When prepping for budget season, business professionals should consider that driver-based budgets are the more practical, predictive choice.
What Is a Driver-Based Budget?
Focusing primarily on identifying the key business elements (drivers) that impact revenue is the foundation of building a driver-based budget. This approach focuses on the aspects of the company that have the most direct impact on (and best reflect on) performance. By using budget drivers, business leaders can more accurately estimate revenue and costs.
What Are the Benefits of a Driver-Based Budget?
Companies across many industries can reap compelling, lucrative rewards from adopting a driver-based budget. Let’s discuss the four biggest benefits they can expect.
How will a company handle unforeseen events? Are they strong enough to weather the storm, or will they sink from the pressure and stress? Using a budgeting software platform to run predictive exercises offers even more insight into the results. Properly identifying drivers gives organizations a way to look at variables and see how they would affect their business.
Instead of getting mired down in budget details, companies are more agile and flexible. Instead of only weighing and including financial variables, driver-based budgets factor in operational and other key performance indicators (KPIs) to create a more well-rounded result.
Not only can they proactively address negative threats, they can help companies more quickly take advantage of opportunities as they arise.
Greater Cross-Departmental Collaboration
Drivers don’t come from a single department. There’s valuable information gleaned from almost every corner of the company. When different departments get a chance to contribute to a project like a driver-based budget, they become more invested in its success. Plus, if each section of a company functions as a silo, the budget will only be one dimension and not as effective as one that’s all-encompassing.
Reduces Budget Negotiation Shenanigans
The “squeaky wheel gets the grease scenario” is a big factor in traditional budgets. Business heads with the biggest, most persuasive personalities may end up getting larger chunks of the budgets than their quieter, laid-back counterparts.
Not only is this unfair, it’s not in the best interests of running and growing a company. With driver-based budgeting, data pushes the decisions, making them more objective.
How Do You Identify Drivers?
We’ve referred to drivers as integral parts of creating a successful driver-based budget. But what are the best ones? How many should companies identify? And can they fluctuate?
Each industry (and company) will have specific drivers, although some of them are relevant across the board. Here are some common drivers companies use in their budgets.
Common internal drivers
These drivers exist inside the company and are unique across companies.
- Market size, shares, and growth
- Number of customers or clients
- Number of orders or shipments
- Sales volume and average price per sale unit
- Website traffic
Common external drivers
External drivers are impactful situations that are occurring outside the company. External drivers may affect more than one company across the board.
- Economic and market conditions
- Competitor positioning
The better a company is at identifying its most important drivers, the stronger and better performing its budgets will be at predicting spending, costs, and tolerance for unforeseen events in the coming months.
Why Are Spreadsheets Unhelpful in Driver-Based Budgeting?
Many organizations, especially smaller businesses, choose to use spreadsheets for their budgeting needs. And, while they are a comfortable choice for those who know how to navigate them, they fall short of creating driver-based budgets.
Spreadsheets offer no assistance in pinpointing the most important drivers for the organization. It can be time-consuming for business leaders who are working from spreadsheet budgets to deduce which drivers they need to use for driver-based budgeting.
This dilemma is why many organizations that adopt driver-based budgeting opt for an automated budget planning software platform to handle their budgeting tasks.
This type of budgeting tool performs better than spreadsheets by:
- Analyzing the impact of internal and external drivers quicker and more succinctly.
- Creating consistency across the business.
- Establishing a more transparent, trustworthy process.
- Offering scenario simulations to help leaders identify and plan for unexpected occurrences.
- Streamlining the time and effort it takes to gather budget data.
What Are Rolling Budgets?
Some companies update and refine their budgets on an ongoing basis, instead of creating them for a year and setting it in stone. Creating a budget for each month or quarter, or “rolling” it, can offer distinct benefits to an organization.
- They accurately represent a company’s financial state at a given point in time, with fewer assumptions than a traditional budget.
- They offer greater agility by managing change more efficiently.
A driver-based budget can also be a rolling budget. Using both concepts simultaneously can make companies stronger, their processes more predictive, and help them grow faster.
Adopting a Driver-Based Budget
Driver-based budgets are dynamic tools that align the entire company and prepare it for the inevitable scenario that affects plans. By employing this type of budget, companies insulate themselves from risk, open themselves to opportunities, and give themselves a way to use data metrics to reach more informed decisions.
Centage provides modern FP&A software solutions that empower Finance teams to lead the way to a stronger, more agile business. Our cloud platform, Planning Maestro, makes sophisticated budgeting, planning, and forecasting easy and accessible. Intuitive automation accelerates workflows and improves accuracy, enabling Finance leaders to deliver reliable information and meaningful insights at the speed of today’s business. For more information on how to modernize your FP&A process, view our product demonstration video, or call 800-366-5111.