What is Driver-Based Forecasting?
Driver-based financial planning is a process of identifying the key activities (also known as βdriversβ) that have the highest impact on your business results, and then, building your financial plans based on those activities.
When you can measure and influence these activities, you can successfully manage and grow your business.
π§ The significance of driver-based forecasting lies in its ability to establish clear connections between financial outcomes and the underlying operational activities and resources that drive those outcomes.
π’ Example
Imagine you have a SaaS software business, like Modeliks, with a target to achieve 1 million revenue next year π
The key drivers for reaching this revenue target could be the number of clients you need, multiplied by the average price a client pays for your software. But then, the number of clients depends on two different drivers, which are, the number of leads you need to generate, and the conversion rate from a lead into a customer.
- The Number of Leads will determine how many sales employees you need πͺ This driver will also determine the marketing budget you need to attract those leads.
- The Number of Clients will determine how many customer support agents you require in the teamβοΈ
The 1 million revenue target drives a whole set of operational activities and required resources. A driver-based financial plan allows you to logically connect all the operational activities and resources to the financial targets.
If you change your revenue target, all other resource budgets will automatically and logically change.
π Driver-based forecasting also offers flexibility and adaptability.
Since it focuses on the underlying drivers rather than rigid assumptions, it allows you to adjust your forecasts based on changes in your business environment βοΈ
π If you anticipate a shift in customer preferences or market conditions, you can easily modify the corresponding drivers in your forecasts to reflect these changes accurately.
π The driver-based forecasting empowers you to set realistic and achievable targets for your team members.
By aligning their goals with the key drivers, you provide them with a clear understanding of how their actions and contributions impact the overall financial performance of the business βοΈ
π This approach fosters accountability, motivation, and a shared sense of purpose among your employees.
π Monitoring your business performance through the lens of drivers is another valuable aspect of driver-based forecasting.
By tracking the performance of each driver, you can identify areas of strength and areas that require improvement βοΈ
π This allows you to fine-tune your operations and make data-driven adjustments to optimize your business outcomes.
β£οΈ Don't forget to watch our helpful video for simple and practical tips on implementing this powerful approach in your business.
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