What is driver-based planning?
Driver-based planning, a financial modeling technique, helps identify and monitor a company's key profitability drivers. By comprehending these drivers, managers can focus on the most impactful areas for the bottom line and make decisions to enhance profitability. It entails pinpointing the primary revenue and expense drivers, constructing a model linking them to profitability through equations, and utilizing the model to assess various scenarios and optimize profitability.
How to perform driver-based planning
Driver-based planning uses key drivers to predict future outcomes, accounting for factors influencing financial metrics like revenue and profit. This method is particularly valuable for long-term forecasting, accommodating unpredictable driver changes in the short term.
Who uses driver-based planning?
Companies employ driver-based planning to analyze how changes in business drivers affect financial performance, isolating the influence of specific drivers on various financial metrics. This information informs strategic resource allocation and business growth decisions.
Examples of drivers
Drivers include company-specific metrics like revenue, profit, debt, assets, and equity, as well as external factors such as GDP, inflation, and unemployment. Political elements like tax rates, government spending, and trade policies can also serve as drivers.
What to consider when performing driver-based planning
Effective driver-based planning relies on accurate and realistic drivers for every forecast line item. Ensure the appropriate time horizon for your forecast, and perform sensitivity analysis to gauge driver impact on the forecast. Verify your results against historical data and market trends.