Driver-based planning is a financial management technique that relies on identifying and tracking the key drivers of a business’s financial performance. It is a process of developing a financial plan that is based on the underlying factors or drivers that influence a business’s revenue and expenses. These drivers can be any number of things, such as sales volumes, product prices, marketing spending, or employee headcount. To learn more about driver-based planning and other financial management strategies, visit cashflowfrog.com.
Driver-based planning also involves creating driver-based models, which are financial models that use the identified drivers as inputs to forecast financial results. By using driver based modeling, businesses can create more accurate and reliable financial projections and simulations, as the models are based on the actual drivers of performance rather than assumptions or historical trends.
Instead of relying on a traditional, top-down approach to budgeting and forecasting, which may be based on limited information or historical trends, driver-based planning takes a more granular approach, looking at the underlying factors that drive financial performance. Driver based budgeting can help businesses make more informed decisions about where to allocate their resources, as it provides a clearer understanding of the impact that different drivers have on financial outcomes.
Driver-Based Planning in Action
To understand how driver-based planning works in practice, consider an example of a retail company that wants to develop a financial plan for the upcoming year. Instead of simply looking at historical sales figures and extrapolating them into the future, the company uses driver-based planning to identify the key drivers of its sales performance, such as:
- Foot traffic in its stores
- Average transaction value
- Sales conversion rates
By analyzing these drivers and their potential impact on sales, the company can create a more accurate and reliable forecast using driver based forecasting.
How to Use Driver-Based Planning?
There are a few key steps to implementing a driver-based planning process in your business:
- Identify the key drivers of your business’s financial performance. These will vary depending on the nature of your business but could include factors such as sales volumes, pricing, marketing spending, and employee productivity.
- Develop a model that incorporates these drivers into your financial planning process. This could involve building a spreadsheet model that allows you to adjust the key drivers and see the impact on your financial projections.
- Monitor and adjust your key drivers as necessary. As your business evolves and changes, so too may the key drivers of your financial performance. It’s important to regularly review and update your driver based planning model to ensure it remains accurate and relevant.
Get the Whole Picture by Using Key Drivers
Driver-based planning can also be a powerful tool for gaining insight into your business’s financial performance. By focusing on the key financial drivers that influence your revenue and expenses, you can develop a more nuanced understanding of how your business operates and where opportunities for improvement may lie. In addition, driver-based planning allows you to create a more accurate and effective driver financial model. This model will help you to forecast future financial performance based on the impact of different drivers.
For example, if you notice that your sales conversion rate is consistently lower than industry benchmarks, this could be a sign that you need to invest more in your sales training and processes. By identifying and addressing these key drivers of performance, you can improve your overall financial results and drive long-term business success.
Driver-based planning is a powerful financial management technique that can help businesses make more accurate and reliable financial projections. By focusing on the key drivers of financial performance, businesses can gain a more granular understanding of how their operations work and identify opportunities for improvement.