What is Driver Based Planning?

The devil is always in the detail, especially when it’s budgeting time. When we’re in business planning mode we’re looking at what worked well and what didn’t, as well as projecting most likely and stretch scenarios to plan the next year of cash flow. We need the detail to make an action plan to capitalize on opportunities or mitigate risks.

When in planning mode, business leaders want to answer specific questions like: What quantity do we need to sell? How should we price our products? How much stock do I order and when? And to answer these questions, you need historical information and data at the transaction level – data that top-down planning models struggle to capture and house in a single, consolidated view.

This is where driver-based planning comes in. As an integrated bottom-up approach to budgeting, driver-based planning and budgeting gives business stakeholders visibility into what key business drivers impact the bottom line - so they can best allocate resources and drive performance.

What is driver-based planning?

Driver-based planning, also known as driver based budgeting, is a financial planning process that focuses on the activities (known as 'drivers') that impact business performance. It's based on the idea that certain activities drive business results, and if you can measure these activities, you can influence results. By linking budgets to the resources behind each activity, you can allocate the right mix of resources based on your desired outcome. This allows you to focus resources on the most critical factors that drive success and see how metrics from different teams across the business roll up to the financial statements. Additionally, driver-based planning helps you easily adjust your team's forecast based on real-time, reliable data and play out different scenarios to see the financial impact of different decisions.

Driver-based planning & driver based forecasting

Driver-based planning and driver based forecasting are two complementary financial modeling processes that focus on the key factors (drivers) that influence a company's performance.

Using the same drivers you can create both long term forecasts (predictions) and shorter term budgets (financial plans) that are more dynamic and adaptable to changing circumstances.

The benefits of driver based planning

Driver-based planning creates a direct line of accountability between budget allocations and actual business results. This means that the budget is tied to the outcomes of specific activities, enabling a clear assessment of financial performance against established targets. By having commonly understood estimates built upon reasonable, mutually agreed business rules driving the budget, performance management becomes relatively easy. Furthermore, driver-based planning brings flexibility into budgeting and planning processes, allowing for adjustments in resource allocation and performance targets as appropriate. This adaptability ensures that the budget remains aligned with the desired outcomes, without compromising the underlying business rules that guide decision-making. 

Compared to traditional budgeting, driver-based planning not only focuses on the activities that drive business performance but also establishes a direct link between budget allocations and actual results. By leveraging metrics and KPIs, you can allocate the right mix of resources and assess performance against targets. The flexibility within driver-based planning enables adjustments to be made while maintaining consistency in the underlying business rules. With this approach, you can make informed decisions based on real-time data, ensuring accountability and driving success for your organization.

Connecting results to resources

The power of driver-based planning lies in knowing what drivers have the biggest impact on the bottom line. When you know both the financial and non-financial drivers (such as headcount, sales leads, and quantities sold) you can create meaningful budgets that connect resources to results. This allows you to:

• Focus resources on the most critical factors that drive business performance
• See how metrics from different teams across the business roll up to the financial statements
• Easily adjust your rolling forecasts based on real-time, reliable data
• Quickly test different scenarios to see the financial impact of different decisions.

Examples of driver-based planning in action

Manage demand

Find your demand gap by comparing sales forecasts to your inventory and open purchase orders

Manage lead times

Build in enough lead time by looking at campaign periods, sales forecasts, and stock on hand

Manage headcount

Allocate staff workloads by reviewing sales targets, conversion rates, and sales call volumes

Read more: Why driver driver-based planning is important to modern FP&A

How does driver based planning reduce budget negotiation and gaming the system?
Driver-based planning reduces the need for extensive budget negotiation and eliminates the potential for gaming the system by establishing clear rules and guidelines for budget allocations. Instead of focusing on negotiating specific dollar amounts withe the CFO and finance team, department heads are primarily engaged in determining the underlying business rules that govern budgetary decisions.

For instance, when implementing driver based models, the focus shifts towards defining key drivers such as the size of the sales funnel, conversion rates, average revenue per deal, customer churn and other relevant metrics. By agreeing upon these established rules, the need to demand "doing more with less" diminishes, as the company can base its expectations on historical data and realistic performance indicators.

Driver based planning discourages the practice of padding budgets with unnecessary expenses or engaging in "sandbagging" (deliberately underestimating performance or profitability to manipulate future budgets). By adopting a mutually agreed set of rules for each key business driver, the budget process becomes more transparent and accountable. This reduces the opportunity for gaming the system by ensuring that budget allocations align with established guidelines rather than being subject to manipulation or excessive padding.

In summary, driver based planning reduces budget negotiation by emphasizing the determination of business rules over dollar amounts and discourages gaming the system by promoting transparency, accountability, and adherence to agreed-upon guidelines for budget allocations.

The reality of adopting driver-based planning

While driver-based planning and its benefits sound great in theory, adopting it into your forecasting process can be a challenge. Depending on where your business is on your budgeting and forecasting journey, you might recognize some of these common issues:

Spreadsheets upon spreadsheets

To collect information from across the business, you might have separate spreadsheets for different areas and activities. The data then needs to be shared, imported, and consolidated. This takes up valuable time and often leads to errors.

Lack of security

With so many separate spreadsheets, it’s almost impossible to see who has made what change and when. While you can add some restrictions, these can make it hard for people to provide input when needed.

Time lags

When a change is made to one spreadsheet, information isn’t automatically updated across other spreadsheets that link to it. So before you can do anything with it, you’re left waiting for information to be consolidated.

Poor visibility

Depending on the size and nature of your business, capturing that granular level of detail can take too long or be too complex to manage. This means you could be missing key driver details in your budgeting process.

Driver based budgeting in the sales workbooks was a huge step forward for us, allowing a lot more flexibility and choice about how we determine our sales figures. Phocas facilitates a business-wide, connected and dynamic budget."
Michelle McKee, Group Project Accountant, Haldane Fisher

Extend your FP&A planning with confidence

Driver-based planning in Phocas Budgeting & Forecasting helps businesses break down silos between finance and every other department by connecting and synchronizing financial forecasts across the entire organisation.

Find common ground between teams, when you integrate financial and operational drivers into your budgeting process. Understand the ripple effect non-financial drivers have on the rest of the business. And visualize all of this within one single source of truth, so that real-time information is available whenever you – or other teams – need it. As a result, your budgeting process can be:

Inclusive

Under this approach, everyone becomes involved in the budgeting process, which helps get buy-in from the start

Reliable

Information is automatically available in real-time, so you can create forecasts based on real results

Timely

With no more waiting around for different teams to supply their data, you can re-forecast and adapt to changing conditions fast

Secure

Replace multiple versions with a master budget and forecast where you can set access levels for added security

Accessible

Work with an interface based on Excel for a familiar feel and easy adoption across the business

Flexible

Shape the driver-based budgeting module to suit your business model and adapt quickly to volatility.

Learn more about how you can integrate operational and financial drivers within your business budgeting process by requesting a demo today.