Expert Advice for Medium and Midsize Businesses

5 Reasons Your High-Growth Company Needs Driver-Based Planning

Christiane Soto
Senior Marketing Manager - CX

Most new small-to-medium businesses (SMBs) implement an ERP Cloud solution to handle day-to-day transactions, and they use a mix of spreadsheets/emails/other manual methods to manage budgeting, forecasting, and financial reporting.

Despite the comfort level they provide, spreadsheets that are shared via email can cause a myriad of problems. They can be an adequate tool for early-stage startups with few managers or cost centers. But once growth happens, processes get too complicated for spreadsheets. They are not dynamic or flexible enough to provide a complete view for planning, budgeting, and forecasting. To see what we are talking about, let’s look at driver-based planning and see how this planning methodology is a good fit for growing SMBs that spreadsheets struggle to support.

What is Driver-Based Planning?

Driver-based planning bases financial planning and forecasting on business and value drivers—activities that take place across the company (and outside the company) and “drive’ actions in other areas, but whose relationship remains the linear. Mathematical models are created to allow managers to run scenarios to understand their impact on projected business results and use them to create business plans, budgets, and “rolling forecasts.” Drivers vary by industry and company, but here are some typical examples:

  • Market size
  • Marketing dollars
  • Market share
  • # of customers
  • # of orders
  • Sales compensation
  • # of employees
  • Sales volumes in units
  • Average sales price per unit
  • Price of gasoline (i.e., transportation costs)

Five Benefits of Driver-Based Planning

Driver-based planning goes beyond the basic revenue or cost inputs of a typical financial planning process, which is usually based on last year’s numbers—a very static method that assumes a steady environment and markets. Using last year’s actuals is a woefully inaccurate method in a fast-moving setting. By focusing on operational drivers, management can quickly see how they can (and will) influence revenues, expenses, and cash flow. But what does that mean for a fast-growing SMB?

Here are five benefits:

  1. Planning moves from static to active. With driver-based planning, fast-moving (and growing) companies can translate their business proposition into numbers, making it easier to across lines of business during the forecasting process, and ultimately produce business plans focused on the metrics most responsible for organizational success.
  2. Replace guesses with facts. Forecasts are often developed by aggregating best guesses from across an enterprise without focusing on risks that could have a significant impact on performance. One of an organization’s biggest competitive advantages is agility. Businesses want to be able to respond quickly to changes in the market, productivity, and sales. Key decision makers also want to understand the potential challenges and opportunities that might be on the horizon, so that they can be better prepared.
  3. A focus on resources, not past performance. Driver-based planning focuses on the resources that the company has to grow profitability. It helps fast-growing SMBs to pay attention to what impacts growth and what costs are needed to support growth
  4. Always ready. The traditional budgeting and forecasting approaches that are based on previous year’s actuals makes it very hard for a company to remain (or even become) agile. Driver-based planning lets finance teams run scenarios and predictive models, allowing the company always to be ready for when (not “if”) change happens.
  5. Save time and effort. By not looking at previous actuals on a line-by-line basis and focusing on drivers, the finance team saves time and effort in creating the initial planning, budget, and forecasting documents and also in updating them throughout the year.

Spreadsheets and Driver-Based Planning

It is possible to implement a driver-based planning and forecasting tool using a spreadsheet. Tons of websites will show you how (or sell you the template). But while it is possible, it is not practical. Using spreadsheets for financial planning and analysis (FP&A) has a minimal range of use.

To get the value inherent in driver-based planning, you need a solution designed specifically to support and execute this. With an enterprise performance management (EPM) system—preferably in the cloud—finance and line-of-business managers can work collaboratively, exploring different operating plans to adapt faster to changing market conditions, competitive forays, new regulations, and emerging sales channels.

Learn more about how you can transform finance in your high-growth organization. Read the ebook.

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