How To Power Performance With Driver-Based Budgeting
What drives your business? As an organization, what’s going to move you towards success? And what metrics will you use to measure that success? Whether it’s traffic, demand, interest rates or even the weather outside, every business has its own unique set ......
What drives your business? As an organization, what’s going to move you towards success? And what metrics will you use to measure that success? Whether it’s traffic, demand, interest rates or even the weather outside, every business has its own unique set of drivers—both internal and external. In any given year, the way those drivers perform will in turn impact the performance of your business as a whole. But how much and in what ways will those drivers affect your business? And how can you measure and control their impact? For some finance teams, driver-based budgeting (DBB) is the answer. By tying your key business drivers directly into the budgeting process, DBB gives you long-term visibility into how exactly those drivers affect your company’s strategy and goals. From there, you can decide where in the business to allocate resources in order to positively influence the drivers that matter most—and better see what the impact is over time. Wondering if driver-based budgeting is right for your organization? In this post we’ll look at: What is driver-based budgeting? Applying driver-based budgeting Pros and cons of driver-based budgeting Putting driver-based budgeting into action What Is Driver-Based Budgeting? A form of resource allocation, driver-based budgeting (DBB) takes your most critical drivers into consideration, focusing on the metrics most likely to influence performance and reflect your company’s goals. Rather than depending on written explanations, DBB relies on data and a rules-based approach to tell the story. To accomplish this, DBB looks beyond your budget line items to the data underneath—identifying what’s driving your performance (good or bad), how those drivers correlate with the resources you’re allotting and who’s accountable for them. DBB goes beyond financial, taking into consideration non-financial drivers too and incorporating them into your budgeting process. This includes both internal drivers and those external to your organization that still add to its success. Some examples of what those drivers could be include: Internal Drivers External Drivers Traffic Market size Demand Market changes Market share Competitor market share Number of customers Buying trends Sales volumes Interest rates Sale price Regulatory requirements Ultimately, the success of your DBB process depends on your ability to choose the short list of drivers that most impact your business—and to adjust the drivers you focus on from year to year when your goals and the market change. Applying Driver-Based Budgeting Unlike traditional budgeting, which starts with a line item and works its way backward, DBB begins with an operational driver and ends with its financial outcomes—allowing you to look at the business activities and resource requirements needed to accomplish those goals and directly allocate towards them. In doing so, it links your budget items directly to the people and resources connected to them. Accomplishing all this means creating a single source of truth that links together your strategic, operational and financial plans. A typical driver-based budget might take an approach like this: Step 1: Consider the past. Which drivers have been critical in driving historical performance? What’s the best way to measure them? Step 2: Determine your sales goals for the budgeting period ahead. What sales volume and price changes are you planning to accomplish? What initiatives do you need to accomplish to make those goals happen: how many calls, price quotes, etc. does your sales team need to make to get you to those numbers? Step 3: Plan for operational success. What resources and people do you need to put in place to accomplish your sales objectives? Do you need to hire new team members or will you require new resources, technology or equipment? Each operational decision should be connected through a rules-based approach to your sales initiatives and in turn, to your sales goals. Step 4: Lock in every department’s budget. Build on your sales and operational budgets through subsequent department budgets, linking each back to operations and sales. Every budget decision should be tied back to your original sales initiatives and goals and to the operational decisions you’ve made to achieve them. Step 5: With everything now linked, you have a single source of truth and can start to look closely at the drivers that matter most to see how they reverberate through your company at large—and where you may want to shift resources to reach the financial outcomes you’re trying to achieve. It’s important to point out, though, that a driver-based approach doesn't have to be all encompassing. You might choose to use drivers for some line items in your budget and opt to not use them for others. For example, you may choose to apply drivers to your sales income but not to your marketing expenses. You’ll also want to continue to tweak your drivers from one cycle to the next as your sales goals evolve and operational requirements change with them—making some metrics more or less important over time. Pros and Cons of Driver-Based Budgeting Every business has drivers—but not every business will find driver-based budgeting right for them. While a driver-based process can help you focus your budget, as well as the insights you offer your executive team—allowing you to make decisions more efficiently with the right information on hand—it can also get complicated the more complex your organization is and the more key drivers you have in play. So is driver-based budgeting right for your organization? Consider the pros and cons of DBB: Pros of DBB It helps align your business. If your budget is focused on a handful of drivers critical to your organization’s goals and performance, it’s naturally going to end up more aligned with organizational strategy. As long as you’re following the right drivers for your business, you’ll be budgeting towards your company’s pivotal goals. It allows you to stay on top of change. By keeping a close eye on your business’s main drivers, you’re able to see how change—both within your business and outside of it—is impacting them and why. This will enable you to make the adjustments you need along the way so that you have the right resources in place to keep up. It builds transparency. By keeping an eye on those drivers that matter, you’ll also get a deeper view into company performance and an understanding of what contributes to the success of those drivers—allowing you to focus your resources accordingly. This can empower your team from one budgeting cycle to another—and fuel new insights into how to further support organizational success. Cons of DBB It requires a clear line of sight and access to the right data. Because DBB relies on large amounts of data to gain visibility into your drivers, you’ll need to access that data in a way that allows you to develop clear insights on past, current and future performance. The right technology can help you automate the process and connect you to the data you need. It can be complicated to put into action. DBB requires you to narrow your focus down to only a short list of drivers—-focusing on too many will diminish your success. But that becomes more complex the more complicated your organization is and the more drivers you have influencing performance. If you have too many drivers that are all critical to your business success, it may not be the right time to implement DBB. It can require a change in your organizational culture. DBB focuses on only certain metrics, which may make it jarring for your team and organization if they’re used to collecting data across every line item in the budget. In some companies that can be an advantage—it helps streamline your process—but in others it might be too much of an adjustment for individual departments to make, especially without full executive buy-in. (Check out The Ultimate Guide to Corporate Budgeting to help you better put finance at the heart of everything your company hopes to achieve.) Putting Driver-Based Budgeting Into Action Last, but certainly not least, a successful driver-based approach requires the right buy-in. It’s only when your executive team understands and backs the critical drivers you’ve identified that you can start to set organization-wide goals around them and create transparency on how those goals are going to be achieved. Before introducing driver-based budgeting at your organization, consider whether you have the culture, technology and senior management support to back it—and whether you understand your drivers well enough to hone in on those that matter. With the right pieces in place, DBB can help power your organization’s performance—and enable you to drive it even further towards success. Discover how Vena can help you build a better budgeting process.