What Is Driver-Based Forecasting & Why Does It Matter?
Posted on: July 31, 2022
Business leaders must have a planning approach that takes them from hindsight to foresight. It’s essential the finance team shifts from backward-looking scorekeeper to forward-looking strategic adviser. They need to be able to accurately forecast where their organization is going so that they can make the best decisions to weather the current financial storms and grow during challenging times. This is where driver-based planning becomes the right solution.
What Is Driver-Based Forecasting?
Driver-based planning is a method of forecasting that focuses on the key drivers of business results. You might think it’s the same as focusing on key performance indicators (KPIs), but it’s actually quite different. While KPI reporting is crucial, this is a different method by which to report.
You can look at it this way: Your decision-makers have goals. Key results must be achieved for these goals to be met. These key results are the KPIs that must be tracked. The drivers are the activities that must occur to hit those targets.
Driver-based forecasting is critical because it emphasizes the relationship between the financials, operational results, and team players. Metrics don’t exist in isolation on financial statements; they are determined by causes and effects within the entire business.
This driver-based approach is characterized by using formulas that rely on a thorough understanding of the relationship between the independent and dependent variables used to model outcomes.
Drivers vs. Assumptions
If you’ve ever tried, and failed, to implement rolling forecasts in your company, poor driver/assumption construction might have been to blame. That’s why effective driver-based planning always starts with understanding the difference between drivers and assumptions.
Assumptions are based on historical data. You can certainly update them as business occurs, but they aren’t as dynamic as true business drivers in a model. Now there are certainly assumptions you can build into your model, such as, for example:
- Sales Rep Quota
- Sales Team Quota Attainment
- Sales Rep Ramp Rate
- Sales Rep Attrition Rate
These assumptions work in conjunction with business drivers to rationally and logically model out your goals. Drivers are flexible. They’re scalable inputs for the model – essentially levers you can pull to influence performance outputs.
Effective drivers must:
1. Be values you can control directly. For example, you can control how many salespeople you have in your organization as a driver of revenue growth. You should be able to expect that each new sales employee will increase financial growth. You’ll need to factor in their ramp rate as a drive to help calculate when you can expect more leads in your sales pipeline.
2. Scale alongside your business. In our sales headcount example, each new hire should drive an increase consistently in revenue growth.
Having a clear understanding of what is a driver versus an assumption is imperative. But the real value of driver-based forecasting is when you effectively link the two together as you build out planning models and reporting processes.
3 Steps To Building A Driver-Based Forecast
1. Define & align your business goals.
2. Break these out into KPIs to measure these goals.
3. Break down those KPIs into key drivers, assumptions, & results.
Why Driver-Based Forecasting Matters
A big strength of driver-based forecasting is that it allows for quick and easy what-if analysis. All you need to do to see the results of different scenarios is to change a variable and the results flow through your model so that you can then see the outcome.
These models provide excellent flexibility; however, they also require a deep understanding on the part of the modeler of how each variable affects the other. These models can also require more time up-front to develop than “judgment-based” or “statistical” models.
Driver-based planning is also important in helping executives understand the true value-drivers of their organization, and how changes in these drivers can impact future business outcomes.
Advantages of Driver-Based Forecasting Software
Driver-based planning software saves critical resources – time and money – in your financial budgeting and forecasting. By eliminating the line-by-line approach and focusing on key business drivers, decision-makers can save an extraordinary amount of time and effort in creating the initial budget, along with updating their financial forecasting throughout the year.
For an in-depth look at driver-based planning, watch this webinar on Forecasting for Difficult Times: Why You Need Driver-Based Planning + Budgeting & How To Succeed.
Jeana has been in the software industry for 15+ years specializing in ERP reporting solutions. She has decades of experience in creative content development and marketing and enjoys exercising, traveling & spending time with her husband & twin boys.