Driver-Based Planning: The Benefits & The Barriers

The Shift to Driver-Based Planning in Budgeting

As CFOs and budget managers continue to take on more critical roles in operations and decision-making across organizations, the budgeting and planning process has evolved. This is where driver-based planning has gained traction over the traditional annual budgeting and planning process in many businesses.

What is Driver-Based Planning?

Driver-based planning works to identify key business drivers such as the number of products sold, number of salespeople, number of stores, website traffic, units of production, etc, and creates models around them. These driver-based models link to the operating plan and can help predict how an organization would fare when faced with different variables.

What makes driver-based planning intriguing 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 budgeting method that is typically bottom-up, heavy on details, and rather complex, driver-based planning 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.

In the end, the ability to make decisions quickly is the real goal of a driver-based plan. Many organizations use it to help management develop a system that helps key stakeholders become more agile and effective.

Key Benefits of Driver-Based Planning

There are several benefits to a driver-based plan, which is why it has become more popular in recent years among companies. Here are a few benefits:

Define Your Drivers

Every business has a 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.

Agility

One of the biggest reasons why some companies are moving to this style of driver-based 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. 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.

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, they often spend too much time on budget preparation and data entry. With a driver-based system, departmental productivity increases. Finance 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.

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. Driver-based forecasting and budgeting enable CFOs to focus on the data that specifically matters to business performance, both removing unnecessary data and helping to ensure the numbers can be trusted as the single source of truth.

Operational Alignment

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. 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.

Key Barriers to Driver-Based Planning

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 planning system.

Identifying Financial Drivers

For a driver-based planning system to truly work well, organizations need to have a stack of key financial drivers identified. It’s important to get stakeholder buy-in on what they are along the way to ensure accountability across the organization. Keep in mind that 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 a driver-based plan. An already large spreadsheet will likely be taxed even more with the macros and equations needed to boil all the data points down into the necessary key drivers.

Final Thoughts

As you explore driver-based planning in more depth, you’ll likely discover additional benefits that far outweigh the drawbacks. 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. Driver-based planning offers the flexibility, agility, efficiency, data integrity, and operational alignment necessary for modern businesses to thrive. By overcoming the barriers and implementing this system, CFOs and budget managers can drive their organizations toward more strategic and informed decision-making.

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