The Budgeting Blues
You’ve just wrapped up another marathon annual budget cycle spanning multiple months, countless late nights and endless revisions; you’ve finally pinned down the dreaded planning gap between top-down targets and bottom-up submissions. You appear to have a fairly consistent set of functional budgets with marketing initiatives aligned with sales targets, which in turn are aligned with operational plans and a suitable workforce plan. It is a masterpiece. Unfortunately, during the months since the budget cycle started and the corporate targets were agreed, the world has moved on, leaving your budget masterpiece in tatters.
A Better Way: Driver-Based Budgeting
Surely, there is a better way? Enter driver-based planning: a thoughtful approach that focuses on the key factors that truly move your business forward. Instead of getting bogged down in granular line-item details, driver-based budgeting focuses on identifying the key business drivers that really move the needle for your company. These could be things like sales growth, production capacity, headcount, or any other factors that have a major impact on financial performance.
By building your budgets and plans around a focused set of core drivers, you can create a more agile and responsive planning process. As the world changes, you can easily adjust your driver assumptions and assess the ripple effects across the business. Driver-based budgeting also aligns inputs to the right business owners – the sales team weighs in on bookings forecasts, operations gives their view on production capacity, and so on. This not only leads to more accurate plans, but also creates accountability and buy-in across the organization.
Defining the Right KPIs
To get started with driver-based budgeting, the first step is to nail down the right key performance indicators (KPIs) for your business. But more isn’t always better when it comes to KPIs. The most effective driver-based models focus on a concise set of metrics that:
- 1. Can be reliably and consistently measured for historical actuals
- 2. Are predictable enough to forecast
- 3. Have a direct link to key business goals and objectives
- 4. Have clear business ownership
For example, a software company might zero in on KPIs like new logo bookings, billings growth, and sales rep productivity as core drivers of the sales model. The finance team partners with sales leaders to pressure-test the assumptions, and the model projects how different scenarios would flow through to revenue, margins, and cash.
Eliminating Data Silos
With the right KPIs defined, the next step is to eliminate data silos and create “one source of truth” in your budgeting process. Driver-based budgeting thrives on collaboration and integration – sales, operations, finance, and executive teams all need to be looking at the same set of numbers. Modern cloud-based planning platforms make it easy to connect data, build driver logic, and engage business users in a streamlined process.
Planning with Agility
Driver-based budgeting enables a dynamic, rolling forecast rhythm to replace the annual or quarterly budgeting cycle. By refreshing forecasts on a monthly basis (or more frequently), you always have an up-to-date view of where the business is headed, allowing for more informed decision-making and better resource allocation.
Pair this with the ability to regularly and efficiently generate multiple additional “what-if” scenario versions and you gain the agility to quickly course-correct as conditions change and new opportunities or threats arise.
A True Business Transformation
But driver-based budgeting is about more than just building a better mousetrap. Done right, it can be truly transformative for an organization. It elevates the role of finance to focus on strategic business drivers rather than just policing the numbers. It creates alignment and accountability across functions. And most importantly, it arms decision-makers with visibility and insight to navigate through periods of volatility and change.
Start today
In a world of rapid change and pervasive uncertainty, agility is the ultimate competitive advantage. By focusing your planning efforts on the critical drivers of your business, you can position your organization to ride out the storms and seize new opportunities. So ditch those broken spreadsheets, engage your business partners, and start your journey towards more dynamic, driver-based plans. Your future self will thank you.
Revelwood is dedicated to helping the Office of Finance succeed through the strategic use of technology. We have a nearly 30 year history helping CFOs and FP&A leaders modernize and transform the Office of Finance. Our approach is to focus on your success, speak business first and to leverage best-in-class technology that suits your organization’s unique needs. Contact us at info@revelwood.com to start a conversation on how we can help your Office of Finance be thes best it can be.
More from our FP&A Done Right Series:
10 Steps to Transform Financial Planning & Analysis: A Guide to a Successful FP&A Implementation
Workday Named a Leader in the Gartner Magic Quadrant for Financial Planning Software
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