The goal of driver-based planning is to focus business plans on the factors that are most critical to driving success, then creating mathematical models that enable managers to run scenarios based on these drivers to understand the impact on projected business results.
For example, driver-based planning can be useful in long-range strategic planning, where Finance executives need to project long-term trends for revenues and costs. Key drivers will vary based on the industry and company, but here are some typical examples:
- Market size and growth
- Market share
- # of customers/subscribers
- # of orders or shipments
- Sales volumes in units
- Average sales price per unit
Driver-based planning can also be applied in more detailed financial budgeting for the upcoming fiscal year, as well as in creating rolling forecasts to update budget assumptions. Here, instead of having managers budget or forecast every single line in their cost center budgets, the focus is on updating key metrics that drive other line items via calculations. So in the example shown below, we’re focusing on the number of employees in the cost center and the average annual costs for communications, computers, and office supplies.
From these drivers, we can calculate and forecast annual communications costs, computer costs, and office supply costs. Then, when analyzing budget variances, we can understand the true drivers behind the variances. In traditional budgeting, this level of detail is often not readily available, or it’s in some disconnected working papers. This technique is often used for other areas, such as travel expenses, staffing a call center, or building out a regional sales organization.
Driver-based planning saves a lot of time and effort in budgeting and forecasting. By eliminating the line by line approach and focusing on key business drivers, manager can save a great amount of time and effort in creating the initial budget, and also in updating their forecasts throughout the year.
Driver-based planning is also highly valuable in helping executives understand the true value-drivers or levers of their business, and how changes in these drivers can impact future business outcomes.
To learn more watch this webinar replay.