The benefits of driver-based planning—an approach that links financial forecasts to operational activities—are indisputable. Unlike old-school, static plans, driver-based forecasting deepens transparency into operational drivers of performance and encourages collaboration with business stakeholders by producing plans that are laser-focused on the metrics that actually matter.
And make no mistake: Meaningful metrics are a top-of-mind issue among finance leaders. In a recent Adaptive Insights survey, nearly half of the 533 global CFOs cited the inability to align with other departments on key metrics as a significant problem.
“One of the most important things for us is to empower our operating partners with financial and performance metrics and be able to bring those elements together to look at the business as a whole,” said Jim Bell, CFO of P.F. Chang’s, whose planning models now incorporate operational performance drivers in addition to traditional finance KPIs.
To help you get started, below are five guidelines for creating a driver-based budget that truly works.
Step #1. Define your drivers carefully
When you’re implementing driver-based planning, it’s best to stick to the most important factors. Work closely with business stakeholders to identify all the relevant operating drivers that impact business and financial performance. Review past variance reports to identify major sources of variances. Focus on operating drivers and assumptions that have a material impact on financial performance, are easily available, and are actionable.
Step #2. Reach out to other departments
At Adaptive Insights, we like to invoke John Donne’s axiom that “no man is an island.” This is doubly true when it comes to creating an effective driver-based plan. Collaborating with every business unit helps employees better understand how each group makes decisions and defines success and how each department affects the whole company. This high-level transparency, in turn, makes it easier to create the multiple scenario plans outlined in step three. Scenarios that are based on cross-departmental data let the FP&A team easily see how a single change—say, increasing headcount—flows through the budget, affecting capital expenditures for laptops and benefits, as well as anticipated potential revenue.
In the end, this kind of collaboration creates a state of clarity that’s the holy grail for high-performing organizations. It’s something we refer to as a single source of truth: a core set of operational and financial data, accessible to stakeholders across the entire company, that allows for clear and consistent communication about performance. And it changes everything.
Step #3. Implement a rolling forecast
Don’t put up with once-a-year, spreadsheet-based forecasts filled with thousands of overly detailed line items that immediately become obsolete. Instead, turn your forecast into a constantly evolving process that focuses only on the significant business drivers you just defined in step one. These forecasts typically roll forward actuals every month, so it’s easy to see a company’s real-time performance against goals. A rolling forecast is a key component of active planning, which takes into account the always-changing business environment and helps senior management better manage the future.
Step #4. Ask “what if?”—all the time
It’s a pretty dismal statistic: Just 1% of companies achieve 90% forecast accuracy 30 days out. According to Adaptive Insights’ CFO Indicator Q2 2016 report, just one in four CFOs met their sales forecasts, and 16% of those who missed were off by 6% or more. Yikes. The way to beat the odds and keep your forecasts accurate is to be prepared by continually updating multiple “best,” “worst,” and “most likely” scenarios. The problem is that managing multiple scenarios in Excel quickly devolves into a time-sucking nightmare. By using a cloud-based active planning tool, you can effectively examine a variety of criteria and adjust plans painlessly.
Step #5. Monitor performance—and course-correct earlier
Tracking what’s changed across your business since you determined your initial plan is a hallmark of active planning. Instituting processes that track actual performance versus your budgets and your forecast is critical to ensuring the success of your driver-based plan.
Every department lead/cost center owner needs actionable insights into their operational and financial goals. They need to know what happened and why it happened—and what is likely to happen in the future, so that they can fine-tune performance, identify risks and opportunities earlier, and take corrective actions sooner.
And keep in mind that it helps to use software that enables driver-based planning and provides visual dashboards and reports so managers can more clearly see what the data means and how they’re stacking up.
Our CFO Indicator Q3 2017 survey explores CFOs’ confidence relative to data and technology, as well as their progress in moving toward a “single source of truth” (single source of financial and operational data). Results reveal that Finance has successfully cleared what we believe to be one of the most significant hurdles—their hesitancy to store data in the cloud. Read our other CFO Indicator reports here.