Branded image of a man in a blue shirt working at a desktop computer.
Blog

How To Power Performance With Driver-Based Budgeting

November 12, 2020 |

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:

  1. What is driver-based budgeting?
  2. Applying driver-based budgeting
  3. Pros and cons of driver-based budgeting
  4. 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:

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

 

Cons of DBB

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.

Recommended Posts

Vena Launches Two New Initiatives to Help Businesses Plan for Today and Tomorrow

April 12, 2020 |

Read More

Vena’s Business Continuity Response to COVID-19

March 16, 2020 |

Read More

Vena Solutions Fills Top C-Level Positions as It Readies for Next Phase of Growth

February 27, 2020 |

Read More