CFOs are increasingly changing their financial planning strategy to a driver-based approach. This method focuses an organization’s financial modeling on the most important factors that power its performance. By moving away from traditional budgeting or choice-based planning methods to a driver-based approach, organizations are able to identify, and prioritize focus on, the business elements that contribute the greatest to their success.
Amid the volatility and uncertainty of the current global business environment, a driver-based approach enables more agile financial decisions, faster adaptability to market developments, and markedly improved efficiency.
What is driver-based planning?
Driver-based planning is a system of financial management that focuses on the key components that generate company performance. It identifies what these key business drivers are by using high-quality data, which a financial team gathers from various areas of the business. It also enables the finance team to direct strategic decisions using financial modeling. These models use different sets of possible performance variables to produce highly precise scenario reports.
Some examples of key business drivers include market share, number of clients, revenue per client, sales conversion rates, and customer lifetime value, among many more. Of course, each business is unique and will have different drivers, based on industry, geography, business model, cash flow, and expertise, among other factors.
What are the benefits of driver-based planning for finance teams?
There are numerous benefits of using driver-based planning, when executed correctly.
1. True identification of key business drivers
Two or more executives in a business may have very different views of how to measure and interpret performance. As data is at the heart of driver-based planning, there is no room for subjectivity. It produces objective truths about what really matters to business continuity and growth, enabling a company to understand exactly, in granular detail, what and how specific elements drive performance. As a result, it positions organizations to focus resources on these areas rather than on others which generate poor return on investment.
2. Quick and easy scenario planning
One of the key strengths of driver-based planning is that it equips the financial department to understand what possible scenarios could mean in terms of outcomes for the business. To do so, they simply need to run different variables through their key driver-based modeling system. As a result of scenario planning, they have relatively effortless and fast data-driven insights, which in turn enables forward-thinking, precise planning as well as the ability to adapt more quickly to unforeseen events.
3. Markedly improved agility and adaptability
In the current unstable global business landscape, companies must be able to adapt quickly. In recent years, companies around the world were caught off guard by a number of extraordinary events, especially the Covid-19 pandemic, the trade tariff war between the United States and China, and more recently, the Russian invasion of Ukraine.
Business continuity in the face of extraordinary events was generally viewed as a low priority. This is no longer the case, with many such events presenting existential threats. Driver-based planning enables greater adaptability and financial agility, as it supports predictive modeling and works in synchronicity with rolling forecasts. As a result, organizations can better prepare for and respond to unexpected developments compared to when using traditional financial planning methods.
4. Enhances inter-departmental collaboration and alignment
The data that powers driver-based planning comes from all areas of the business, such as the sales and marketing departments. To exploit driver-based planning to its fullest potential, consistent collaboration across departments is critical. This also positions employees on the finance team to get a much better understanding of the business from the point of view of other departments and it also gives other departments influence in shaping the budgeting plan and capital allocation.
How to use driver-based planning
Traditional financial plans tend to be created once, for the fiscal year ahead. As a result, they may be used at the beginning of a year, but as time advances and business circumstances evolve, they become increasingly obsolete. Moreover, getting an accurate idea of each department’s budgetary needs takes time, often months. This creates major inefficiencies. Driver-based planning changes this dynamic by establishing efficient data gathering and performance management capabilities, and enables ongoing refinements in line with what transpires for the business.
The keys to position a company for optimal success with a driver-based business plan is to ensure consistent flow of rich business data, smooth and open collaboration between the financial department and its counterparts across the company, and a solid financial modeling and planning environment to derive the right financial outcomes, which is made up of process and technology.
Another critical component of using this integrated business planning method is a clear awareness of how significant of a change from traditional planning it is and the need to get the entire financial team on board. By highlighting the outstanding benefits that driver-based planning can deliver, particularly in times of market turbulence, CFOs can convey the immense value that it can bring to the entire organization.
How to define key drivers for your organization
Driver-based planning is for business areas that include variable metrics. It is the decision of the CFO as to which business areas to assess with a driver-based model approach. By carrying out a deep analysis of the entire business, a company can identify its key drivers.
To do so, each company should focus on what drives sales, cash flow, and expenditure. Each of these three areas merits detailed assessment. The Pareto Principle likely comes into play here, which states that 20% of production generates 80% of results and that 80% of production generates the remaining 20% of results. The accuracy and efficiency of this exercise is dependent on the ability to gather precise, high-quality data. This key driver definition process can then be referred to at later stages as part of the overarching driver-based planning system.
Powering business success with driver-based planning
A driver-based business plan supports modern organizations with a forward-thinking financial department to truly focus on the areas of business that matter to performance and growth the most, which significantly improves operational efficiencies. It also equips them to incorporate greater flexibility and data-based precision into their financial planning, enhance strategy and execution alignment across the organization, and position the financial department further as the key driver of business performance. In especially volatile and uncertain global markets, driver-based financial planning is uniquely capable of helping organizations strengthen their business continuity framework.
Financial teams can carry out a driver-based approach in a spreadsheet environment. However, to really optimize it and harness it to its fullest potential, the right advanced financial planning and analysis software platform is required. Such a platform automates data management from across the company, enables cross-departmental communication and collaboration, identifies and monitors key drivers, and provides all the requisite capabilities to carry out fast, accurate scenario forecasting and financial modeling.
