Driver-based budgeting is a technique to create your financial budgets based on the drivers that are generating revenue and cost and impacting working capital, solvency and liquidity in your company.
To apply the driver-based budgeting technique it is important to understand what the drivers for the different functional processes within your company are: sales, production, administration, research and development, warehousing, logistics and other.
Usually, drivers will be identified as quantity measure (Q) or economic value drivers (P). Multiplication of both drivers (P x Q) will reflect an income or expense which can be related to a specific income or cost line with your P&L. After having identified the drivers, it is important to validate if actual data is captured to monitor and measure the actuals on those measures.
Typical drivers are volumes, energy consumption , headcount converted to FTEs, number of invoices, or business travels, and others. For each of the volume drivers a value by unit driver needs to be provided. In reality, drivers are mostly less transparent than those we all know. In service companies for example, sales drivers can be split into different sub drivers: number of non-qualified leads (a) , number of qualified leads (b), number of signed contracts (c) and the conversion ratio from the a to b to c. Besides quantities, it is also important to identify the sales cycle time from to a to b to c and at the end the average value of each opportunity. Combining these sub drivers will create an insightful sales budget based on real drivers known by the sales responsible.
Why does Driver-Based Budgeting matter?
- Using a driver-based budget technique increases the accountability of the real budget holder. The budget holder is responsible for the drivers’ estimation.
- Using a driver-based budget creates a higher transparency in the financial result as outcome of several operational activities and actions. Responsible managers can understand easily why a revenue or cost varies from actual to budget.
- Performance measurement is based on drivers. Finance measurement is the result of driver values realizations.
- Measuring performance on driver values permits you to react quickly to changing external factors that influence the business drivers by using “what-if” simulations and measuring the outcome of each action impacting the financial outcome.
- The finance controlling department can become more of a business partner instead of a financial controller. Evaluating the impact of drivers on the business creates an environment for teams to be more aligned. Finance is more aligned with the business and the business can plan and run their business in a more logical way, in terms they understand better than the traditional budget lines.
How to start with Driver-Based Budgeting techniques?
- Identify the drivers for your P&L and Balance sheet: make use of a materiality analysis and identify the material P&L lines most impacting your operating profit.
- Validate if actual data is captured in an automated way for the drivers identified
- Automate your process as much as possible to collect driver values and compute impact on P&L
Starting to set-up a driver-based budget process is very beneficial in current economic volatile times. It is not difficult but needs a very good understanding of your business drivers impacting the financial operating profit. DBB offers distinct advantages over traditional planning and budgeting, but its success depends on having the right technology in place.
Do you have question or need more information? Aexis is an expert in Corporate Performance Planning, FP&A and Driver-Based Budgeting Techniques and can help your organization. Our experts are happy to help you with this! Contact our experts for more information.