4 ways that driver-based budgeting can improve financial planning
A graphic equalizer can be used to adjust and improve the frequency of sounds in the recording process. It can soften certain sounds while making others more prominent. Similar to knowing how fine-tuning the levers on an equalizer can impact different sounds, understanding the drivers of your business is a critical component of enterprise planning.
Recognizing and understanding the impact of adjusting and testing those different levers within financial planning and analysis (FP&A) processes can help businesses develop more harmonious, pragmatic, and reliable budgets and forecasts.
What business drivers are and why they matter in driver-based budgeting
A driver-based budgeting (DBB) process evaluates drivers, which are the business elements that influence financial performance, to link demand with the resources needed to fulfill it. DBB approaches are flexible by nature and can be implemented in nearly every industry. Some of the more common industries that use these approaches with success are sectors with repetitious costs such as healthcare, hospitality, consumer packaged goods, and insurance.
Each industry—and each business—will have its own unique set of drivers. These could include a business element such as weather for an airport hotel, which has an impact on forecasts and projected revenue. Other business drivers could include economic and market conditions, competitor positioning, headcount, assets and inventory, and critical processes.
Although a range of internal and external factors can qualify as a driver, organizations practicing DBB typically focus only on the elements that most accurately reflect the performance and progress of the business. This allows the business to focus on making the right strategic top-down decisions in a timely, agile, and efficient manner.
Four benefits of driver-based budgeting
DBB approaches are neither complicated nor new and the majority of budget contributors apply them in some form today. However, when these business plans are executed through spreadsheets, it can prove difficult to uncover the business drivers with maximum impact on the business and incorporate them into the budgeting process. DBB becomes a transformational process when the approach is deployed using an automated, cloud-based planning platform that provides visibility and transparency into driver insights.
Here are four benefits that an integrated DBB approach can offer businesses:
- Driver-based plans allow organizations to assess the impact of internal or external changes very quickly. Budget holders can spend their time analyzing the drivers of the business rather than arguing about the multitude of line items in their budget.
- Leveraging drivers for outcomes creates an environment for the finance team that is more aligned across the business and provides more consistency across the business functions.
- “What-if” scenario analysis is often conducted through the modification of drivers and the resulting financial impact. This agility supports necessary insights and executive decision-making. Visibility and transparency into drivers throughout the planning process allows organizations to understand, in a very effective way, the impact of those drivers and what even small adjustments can mean to the bottom line.
- Organizations often spend an inordinate amount of time collecting data from budget holders that could easily be driven by a handful of inputs. It is much more streamlined to ask individuals to think in terms that are logical to the way they plan and run their business. For example, a sales manager is more likely to think in terms of how many trips his team members will take within a given period than how much money he’ll spend on the components of his travel budget.
Today’s business world is uncertain and disruptive, and businesses need a budgeting process that is easy, instantaneous, and agile. The journey to financial transformation means leaving the traditional budget process behind. In its place are better budgeting and forecasting practices, such as DBB, that can help accommodate growing market volatility and cost discipline.