Enhancing Performance with Driver-Based Budgeting
Start by asking yourself the following questions
What drives your business?
What will propel you forward as an organization?
What metrics will you use to evaluate your success?
Every company has its own set of internal and external forces, whether it's traffic, demand, interest rates, or even the weather outside. In any given year, the performance of those drivers will have an impact on the overall performance of your company.
But how much and in what ways will those drivers affect your business? And how can you measure and manage their impact?
Driver-based budgeting (DBB) is the solution for some finance teams. DBB gives you long-term visibility into how your major business drivers affect your company's strategy and goals by connecting them directly into the budgeting process. You may then select where in the business to devote resources to positively influence the most important drivers—and better see the impact over time.
Curious if driver-based budgeting is right for your organization? In this article, we'll define driver-based budgeting, take a look at how to apply it, learn about the advantages and disadvantages it has and understand how to put driver-based budgeting into action.
What is Driver-Based Budgeting (DBB)?
Driver-based budgeting (DBB) is a type of resource allocation that considers your most important drivers, concentrating on the indicators that are most likely to influence performance and represent your company's goals. Rather than relying on written explanations, DBB tells the story using data and a rules-based methodology.
To do so, DBB looks past your budget line items to the data beneath them, determining what's driving your performance (good or bad), how those drivers relate to the resources you're allocating, and who's responsible for them. DBB goes beyond financial considerations, including non-financial elements into your budgeting process as well. This encompasses both internal and external factors that contribute to your company's success.
These are some examples of what those drivers could be:
Ultimately, the success of your DBB process is determined by your ability to select a small number of drivers that have the greatest impact on your business—and to modify the drivers you focus on from year to year as your goals and the market shift.
Applying Driver-Based Budgeting
Unlike traditional budgeting, which begins with a line item and works backward, DBB starts with an operational driver and finishes with financial outcomes, allowing you to look at the business activities and resource requirements required to achieve those goals and allocate directly to them. As a result, it connects your budget items to the people and resources associated with them.
To do all of this, you'll need to create a single source of truth that connects your strategic, operational, and financial objectives. A typical driver-based budget might take the following approach:
Step 1: Consider the past. Which factors have played a significant role in past performance? What is the most accurate technique to measure them?
Step 2: Determine your sales targets for the upcoming budgeting period. What kind of sales volume and price changes do you intend to make? What actions do you need to take to achieve those objectives: how many calls, price quotations, and other activities does your sales staff need to do to reach those targets?
Step 3: Plan for operational success. What resources and personnel do you need to put in place to meet your sales goals? Will you require new resources, technology, or equipment, or will you need to hire new team members? Each operational decision should be linked to your sales activities and, in turn, to your sales goals using a rules-based approach.
Step 4: Lock in every department’s budget. Build on your sales and operational budgets with the following department budgets that are all linked to sales and operations. Every budget decision should be based on your initial sales ambitions and goals, as well as the operational decisions you took to reach them.
Step 5: With everything now linked, you have a single source of truth and can begin to examine the most important drivers to see how they resonate throughout your company—and where you might want to shift resources to get the financial outcomes you desire.
It's worth noting, though, that a driver-based approach doesn't have to be comprehensive. You may choose to employ drivers for some budget line items while avoiding them for others. You might choose to apply drivers to your sales revenue but not to your marketing expenses, for example.
You'll also want to alter your drivers from cycle to cycle as your sales goals change and your operational needs change, making some KPIs more or less essential over time.
Advantages & Disadvantages of Driver-Based Budgeting
Every business has drivers, but not every business will benefit from driver-based budgeting.
While a driver-based process can help you focus your budget and the insights you provide your executive team—allowing you to make choices more quickly with the proper facts in hand—it can also get challenging as your business becomes more complex and you have more critical factors in play.
Is driver-based budgeting a good fit for your company? Consider the advantages and disadvantages of DBB:
Advantages of DBB
It helps align your business. Your budget will automatically become more aligned with organizational strategy if it is focused on a few key drivers that are crucial to your organization's goals and success. You'll be budgeting towards your company's critical goals as long as you're following the correct drivers for your corporation.
It allows you to stay on top of change. By keeping a careful check on your company's major drivers, you can identify how and why change is affecting them, both within and outside of the company. This will allow you to make the necessary modifications along the way so that you have the resources you need to keep up.
It builds transparency. You'll gain a better grasp of corporate performance and what contributes to the success of those drivers if you keep an eye on those that matter, allowing you to focus your efforts accordingly. This can help your team transition from one budgeting cycle to the next, as well as provide new insights into how to support organizational performance.
Disadvantages of DBB
It requires a clear line of sight and access to the right data. Because DBB relies on vast volumes of data to provide visibility into your drivers, you'll need to be able to access that data in a way that allows you to acquire clear insights on past, present, and future performance. Technology can assist you in automating the process and connecting you to the data you require.
It can be difficult to put into action. DBB needs you to focus on a small number of drivers—focusing on too many will reduce your chances of success. However, as your business becomes more complex and the number of drivers influencing performance increases, this becomes increasingly difficult. It may not be the best moment to implement DBB if you have too many drivers that are vital to your company's success.
It may necessitate a shift in your company's culture. If your team and organization are used to gathering data across every line item in the budget, DBB's concentration on simply a few KPIs may be unsettling. In certain companies, this can be a benefit—it helps streamline processes—but in others, it may be too much for individual departments to adjust to, especially without full executive buy-in.
Putting Driver-Based Budgeting Into Action
Last but not least, a successful driver-based approach necessitates the appropriate buy-in. Only when your executive team knows and supports the essential drivers you've identified can you begin to set organization-wide goals based on them and create openness on how those goals will be met.
Consider if your business has the culture, technology, and senior management support to support driver-based budgeting—and whether you know your drivers well enough to focus on the ones that matter. DBB can boost your organization's performance—and enable you to propel it even further toward success—by putting the proper components in place.