Are you tired of using outmoded financial models that prevent you from moving forward with crucial business decisions? With driver-based modeling, the fog will finally lift.
Why live in the past when you can use an advanced driver based model instead of relying on an antiquated financial model? Businesses can enhance their decision-making and communication, eventually optimizing their cash flow management, leading to unimaginable business growth.
So, it’s time to take your success to the next level with this revolutionary technique; read along to learn about it.
What is driver-based planning?
A budgeting technique called “driver-based planning” places more emphasis on identifying the main business drivers than it does on relying on past data. You may get a more thorough and long-term understanding of the company’s financial performance using this strategy.
How does driver-based planning work?
Four stages are involved in driver-based planning:
1. Identify key business drivers
The success of the company’s finances is mainly affected by the drivers. Drivers include escalating expenses for client acquisition, manufacturing costs, and inventory levels.
2. Quantify the drivers
The next stage is to put a number on the factors at play. This requires looking at past data to see if there’s a connection between the drivers and the company’s bottom line. You can build a model to predict the effect of changes in these drivers on the company’s financial performance.
3. Plan potential outcomes
As a third step, you should create potential outcomes. To enable this, it is necessary to develop multiple models to examine how shifts in the key drivers affect the financial results of the business.
4. Formulate a spending plan
This step involves using the scenarios to develop a budget that supports the company’s financial objectives and daily operations.
Typical key business driver examples
The primary forces at play in any given enterprise will likely be unique to its sector, size, and objectives. Some examples of standard critical driver-based models are:
An increase in sales
Increasing one’s revenue stream is essential for a healthy bottom line. The pricing strategies, sales volume, and new customer cost all fall under this driver.
Expenditures incurred in man production costs typically drive businesses in the manufacturing and retail sectors. This element takes into consideration the cost of materials, as well as the salary of employees and any other expenditures incurred by the business.
Stock-on-hand inventory levels are a significant factor in the success of retailers and wholesalers. This factor includes product mix, pricing strategies, and inventory turnover.
Marketing to new customers is expensive
Businesses looking to grow their customer base must consider a number of important factors, including the expense of gaining new clients. These influences include marketing expenditures, sales commissions, and sales incentives.
Benefits of driver-based planning
Benefits that businesses can reap from using driver based planning include:
By factoring in the most critical drivers of the business, driver based forecasting yields a more precise picture of the company’s financial performance. Insight into all aspects of a company’s financial health is provided by this method, allowing for better decision-making.
It brings together a company’s strategic and operational aspects, allowing for more effective prioritization of efforts and a more cohesive approach to achieving the company’s overarching goals.
There is more leeway in setting prices thanks to driver-based planning. Companies can quickly respond to shifting market conditions by revising their budgets in light of these key drivers.
Companies can make better decisions about resource allocation, pricing strategies, and product mix if they thoroughly understand how shifts in the key drivers affect financial performance.
Best practices for driver-based planning
To maximize the benefits of driver based budgeting, businesses should do things like:
● Consult with relevant parties
It is vital to have key stakeholders from finance, operations, and sales participate in driver-based planning to solicit input from the people and groups affected.
● Consider a variety of possible outcomes
Businesses can strengthen their plans by running multiple scenarios to see how various shifts in key drivers would affect the outcome.
● Control and tweak
Since driver based modeling is an iterative process that requires ongoing review and improvement. The company’s progress toward its goals should be measured against them regularly.
● Make use of modern gadgets
Organizations would do well to use technology to simplify the process of driver-based planning, which can be time-consuming and error-prone.
Companies can benefit from a more holistic and predictive view of their financial performance with the help of driver-based modeling and planning.
More accurate and adaptable budgets can be created that align with their strategic goals by identifying and quantifying the critical drivers of the business.