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.
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:
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:
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.