OUR BLOG

Hot Finance Topics for Business Leaders

Share on facebook
Share on twitter
Share on linkedin

Business Budgeting 101: Why a Driver-Based Budget Is Right for Your Organization

For many organizations, there’s often a gap between the business budgeting and planning process and actual strategy and execution. When this occurs, budgeting and operating strategies aren’t coordinated, which can lead to errors, not only in the projected budget but in decision-making, as well. Clearly, this is not something any organization wants to experience.

As CFOs and budget managers have continued to take more important roles in operations and decision making in some organizations, so too has the budgeting and planning process evolved. This is where driver-based budgeting and planning has achieved more traction over the traditional business budgeting and planning process in many businesses.

In this post, I will explain what driver-based budgeting is, why it’s important for your business budgeting, and share with you some of the key benefits and barriers to implementing a driver-based budgeting and planning software system. Hopefully this will help you decide if this method is worth exploring for your company.

What It Is and How It Fits into Your Business Budgeting Process

Driver-based budgeting is a process that ties resources and activities to the financials in the budgeting process. In other words, if the budget for a company calls for a 25% increase in revenue, the driver-based budget must identify those actual resources – marketing, inside sales, regional sales team, professional services – and their activities – lead generation, lead  qualification, prospect meetings, product configuration – to deliver that boost in sales. Drivers inevitably span the entire organization.

In this example, key drivers for this software company may include:

MARKETING:

  • Number/cost of lead generation programs
  • Number of targeted prospects needed to generate desired number of responses

INSIDE SALES 

  • Number of incoming calls needed to generate desired number of qualified leads
  • Number/cost of reps required to handle incoming calls

REGIONAL SALES:

  • Number of qualified leads needed to close new business
  • Number/cost of sales reps required to increase revenue

PROFESSIONAL SERVICES ORGANIZATION

  • Number of PSO staff required to implement solution and generate revenue
  • Number/cost/travel expenses of PSO personnel

However, defining the right metrics is no easy task. The number of potential drivers can be vast and span multiple departments, making it difficult for the CFO to track. Most CFOs we speak to are keen to rein in the number of potential drivers and dimensions to track, as too much complexity makes it difficult to see the big picture of company performance. Therefore, to streamline the task, CFOs tell us they seek to identify financial metrics that serve as proxies to the actual drivers. For example, if the sales funnel is working as expected, the company should expect a specific revenue minimum to enter the pipeline each month.

Why Organizations Choose Driver-Based Budgeting

The traditional business budgeting and forecasting process can be long and painful. Many CFOs and budget managers would agree. On top of that, any number of issues can arise that render forecasts quickly outdated. This leaves key decision makers struggling to make the right decisions with incomplete or inaccurate information.

It’s because of these challenges that many organizations are moving to driver-based budgeting. This approach works to identify key business drivers and creates models around them. These models link to the operating plan and can help predict how an organization would fare when faced with different variables.

What makes driver-based budgeting an intriguing option to many organizations is that it looks at the key drivers from operational activities as the main source of information for the management team’s strategic decisions.

Rather than relying on the traditional business budgeting method that is typically bottom up, heavy on details and rather complex, driver-based budgeting takes a top-down approach that is simple and light. Just enough data on specific drivers is provided to make the right decisions in a more efficient manner.

However, the ability to make decisions quickly is the real goal. Many organizations use it to help management develop a system that helps key stakeholders become more agile and effective.

Key Benefits of Driver-Based Budgeting

There are many benefits, which is why it has become more popular and a welcome change from traditional budgeting and forecasting. Here are some of the most common benefits of the driver-based budgeting and planning approach. 

Agility

One of the biggest reasons why some companies are moving to this style of budgeting and planning is to make decisions more quickly. This not only helps for decision making on the fly when the situation arises, but it also allows for future forecasting and modeling.

 one of the biggest competitive advantages is agility. 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 that might be on the horizon so they can be better prepared.

With the traditional budgeting and forecasting approach, agility can be hard to achieve. A driver-based system enables CFOs to run scenarios and predictive models, allowing for the organization to be ready with a plan for any change.

Less Complex

When it comes to the budgeting and planning process, key stakeholders often find themselves mired in the details. While having all the data available is a good thing, not being able to understand the handful of important data points is not. Using a driver-based budgeting software system can help remove complexity without losing the KPIs that matter.

Organizational Cooperation

More organizations are looking to create a culture that has cooperation across departments. Since the process focuses more on overall operations, it helps to reduce budget battles between departments. This ensures department managers are on the same page and work together to improve business efficiency and productivity.

Operational Alignment

Along with organization cooperation, an organization runs most effectively when information isn’t siloed between departments. As CFOs take a more strategic role in their businesses, they’re often vital in getting key players from different departments on the same page.

After all, a driver-based system will have key indicators from each department. So, rather than being focused solely on budget inflows and outflows, department heads can have a role to play in improving performance as it ties into operations as a whole.

Defined Drivers

Every business has those few key indicators that can give a snapshot of overall performance. Being able to drill down and focus solely on those pieces of data is an advantage—it helps reduce the noise in favor of what matters.

The ability to define your business drivers increases flexibility. For example, many organizations look more at non-financial variables now. The capacity to include variables and key performance indicators unique to the business will make planning more efficient in the long run.

Data Integrity

The worry that their budget and forecasts aren’t accurate comes up again and again with CFOs and budget managers. Incorrect numbers can have a massive trickle-down impact on the bottom line.

A driver-based approach enables CFOs to focus on the data that specifically matters to their organization. This both removes unnecessary data and helps ensure the numbers can be trusted as the single source of truth.

Efficiency

With so much data out there already (and more coming), it’s easy for the finance or accounting department to get swamped. Instead of working on models and analyses, employees often spend too much time on budget preparation and data entry.

With a driver-based system, departmental productivity increases. Employees can spend time focusing on the data that matters—the information the management team needs for decision making, allowing them to run more scenarios, analyze variables and contribute to overall operational strategy.

Key Barriers 

Even with all these benefits, as with any financial budgeting and planning system, nothing is a perfect fix. So, it’s important to be aware of some of the barriers your organization might face in implementing a driver-based budgeting system.

Identifying Drivers

For a driver-based budgeting system to truly work well, organizations need to have a stack of key drivers identified. Seems simple enough, right? However, problems can arise when too many drivers are included, making the model more complex than it needs to be. It’s important to get this right from the start.

Trouble with Spreadsheets

If you’re using Excel as your main system to create budgets and for your planning process, you’ll likely encounter difficulty expanding to driver-based budgeting An already large spreadsheet will likely be taxed even more with the macros and equations that would be needed to boil all the data points down into the necessary key drivers.

Hopefully, you have a better idea of the basics of driver-based budgeting and see how it may be worthwhile for your organization.

Final Thoughts

The goal of driver-based budgeting is to focus the business plan and company resources on the factors most likely to drive success. As you explore driver-based budgeting and planning in more depth, you’ll likely discover additional benefits. This approach might be just the fit you need to improve your budgeting and forecasting processes and give you a firm foundation for the future.

Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.

New to Planning Maestro?

Watch Our 3-Minute Quick Tour Video

With budget season right around the corner, it’s time well spent!

Watch Quick Tour Now