Lots of companies talk about moving to driver-based budgeting or forecasting, but few actually make the leap. Why is it so hard to move away from traditional budgeting and forecasting models? What value is ultimately obtained by making this dramatic change?
For most companies, the traditional annual budgeting process is long and tedious. Top-down guidance is created and communicated during the summer, followed by bottoms up estimates put together and consolidated into late fall. Then final numbers are agreed to with the bottoms up numbers rolled up to match. If you are lucky budgets for the following year are locked down and finalized prior to year-end, but for many companies, this does not occur until Jan/Feb of the current year.
And every year you make notes about what went well, what did not and what you can do to make it easy and more efficient next year. Every year you enhance and refine excel models, you improve assumptions documentation, you simplify the process for consolidating information. And yet the incremental improvements don’t seem to improve the accuracy, or the overall effort required to complete the budget.
If this sounds at all familiar maybe a move to driver-based budgeting is right for you. And you may be closer than you think.
Begin the Budget & Forecasting Process
When you begin the budget process, you typically establish the initial top-down numbers thru applying certain communicated strategic objectives:
- % increase in sales
- % increase in margin and/or price
- % change in direct/indirect procurement
- % salary increases
- % change in employee benefits
- % travel and expense as a sales
- SG&A as a % sales
- % Productivity improvement
You take these assumptions, run some calculations and generate the initial top-down numbers as well as incorporate everything into your published budgeting guidance. In traditional budgeting, an organization plugs their sales & expense numbers to whatever is agreed to and then build in commentary regarding how they are going to get there. When the actuals come in the variance to budget is easy to calculate, but again the explanations exist outside of the system. Everyone has similar industry-specific walks to explain variances, but these are again generally very high level like mix, volume, or price with written explanations. The art in traditional budget/actual variance analysis is remembering the different story lines from budgeting, to YTD or QTD.
Driver-based budgeting allows you to begin to get away from the written explanation and let your data tell more of the story. Over time you gain better insight into the relationships between various parts of your business and how elastic/inelastic various drivers actually are. This, in turn, helps improve the quality and speed of business decisions.
Everyone makes this sound easy. The concepts are simple – you can rattle off the top 10 business drivers in your sleep, but the execution is not. For complicated organizations excel will no longer be a viable option as the models are too complicated. And it is always a challenge to identify the “vital few” drivers to work with and then how detailed to make them. And you need to remain flexible, modifying/removing/adding drivers as the business environment changes and as you gain better insight into what levers truly matter.
The key is “telling the story” for how the budget and forecast was developed. What were the drivers used? What does consumption of resources look like and how are they measured? How can we capture those to understand the logic used to build the plans and then how will we monitor and track those for performance. Shifting to this story telling mode that uses drivers to help tell that story will further integrate FP&A with the other functions and enable discussions directly linked to performance in a function, business, region at a level of detail that makes sense to support insights and proactive decision making on the journey to predictive.
To add more of a dynamic, the popularity then “death” or dying of Zero Based Budgeting (ZBB) has at times confused the value of driver based budgeting and forecasting. Driver based enables that level of transparency to understand how teams are building their plans and can provide some of the benefits of ZBB without the level of cultural impact and level of data and system enhancements needed for full ZBB.
The value of Driver Based Budgeting and Forecasting is foundational and can be pivoted to various levels of detail and process based on your culture and needs. Finding that right balance for driver based budgeting and forecasting is key for adoption of the process while also enabling the data and system environment to support the capabilities needed for driver based budgeting and forecasting.
What to Consider
So if it is complicated and Excel is no longer a viable option – why should I even consider it?
- Eliminate non-value added work. With traditional budgeting, you often end up planning at a level not really needed. Do your finance people plan office supplies at the departmental level? If a department is widely off in this category, will it ultimately make a significant difference? How many other categories of the business are like this? How much time is spent developing and preparing detail no one ever really uses.
- Accelerate month-end financial & variance analysis. Once you have your driver based models developed you can then bring your actuals into them. These models should be designed around the “key drivers” of your business. This structures your financial data around these drivers making understanding the information and communicating it much easier.
- Going beyond the what and moving directly to the why. Traditional budgeting brings the budget to the actuals. The problem this creates is it allows whoever is doing the analysis to create whatever story they believe they can sell. A driver-based budget provides greater visibility to the truth of the story. Do the facts really match the assumptions? It is one thing to have a EBIT walk that identifies the miss being primarily driven by volume. With comments such as, “Volumes on product XYZ were lower than expected. This was partially offset by an increase in the lower margin product ABC”. A driver-based budget scheme could have these details by product line in terms of volume, sales and price as table/chart driven output. No comments necessary with no place to hide.
- Organizational flexibility. With traditional budgeting, we tend to get locked into fixed numbers. Your salary number must be “X”. This then tends to live in isolation. Driver-based budgeting can provide for greater accountability and flexibility. As the business environment changes these would be reflected in the drivers. If you have a driver that indicates the optimum number of customers per sales rep is 50 then if you have an opportunity to expand into a new market with 150 new customers. This can all roll thru and be reflected appropriately allowing for the relationships between the information to be understood and hopefully allow the business to react more quickly to changing information.
Enabled by OneStream
While there are various EPM solution in the marketplace that can enable the Driver Based Budgeting, Forecasting and ZBB concepts discussed here, OneStream has developed core functionality and features within it’s Extensible Finance (XF) Unified Platform that integrates process and data across consolidations, planning, analytics, data management and reporting.
OneStream’s solution immediately enables Driver Based Budgeting, Forecasting and ZBB by leveraging a standard, consistent set of dimensionality that aligns with how leaders run, manage and account for their businesses. Actuals are sourced in a consistent and transparent manner and the solution allows for robust logic and calculations to drive the Rolling Forecast process. This transparency enables Faculty, Staff and other Stakeholders to see how they are being managed and understand the non-financial and financial metrics, KPIs and drivers that are flowing through the system to deliver financial and operational results.
The OneStream XF solution screenshot below illustrates capabilities inherent in the tool related to rolling forecast capabilities unlocked related to scenario planning, modeling and what-if analysis.
The solution has a user interface that is intuitive to many stakeholders and can be accessed via an Excel interface as well to further align with processes as improvements evolve.
In addition, to extend the value of driver based budgeting, forecasting and ZBB output and insights, the OneStream XF solution provides a variety of robust, transparent management reporting outputs allowing slicing and dicing to various levels of detail. Stakeholders and power users are able to customize and optimize how they interact with the data so they keep focused on their areas of domain while maintaining a view of the overall impact to the enterprise.
Blending improvements to process, data, organization and change management with an enabling technology such as OneStream allows our clients the flexibility, velocity and scale needed to make the driver based budgeting, forecasting and ZBB journey knowing they have opportunities to pivot and adapt based on industry, economic and academic impacts.
FP&A continues to have an opportunity within the enterprise to be a trusted advisory providing proactive insights to help manage enterprise performance. FP&A teams continue to be absorbed by process, data and organizational struggles to pivot their focus to these value-added areas.
Getting started with driver based budgeting takes many forms and is impacted by many factors from our client’s culture to catalyst events such as acquisition, new technologies and organizational changes.
Start Small & Scale: We have clients who start small with one business or region and one area of their planning domain (eg Sales Planning) and then build a driver based planning and forecast process using owned technology or even Excel to learn the data challenges, pressure test the drivers, metrics, KPIs and outputs. Then then use this pilot to begin the requirements for a system enabled solution to better automate and scale data using consistent, standard processes that can be leveraged enterprise wide with transparency. This approach also can help with selection of new cloud EPM solutions, aligning processes and data and beginning the adoption and change journey.
Go Big & Adapt: We have other clients who have made the decision to move to Cloud EPM and they want the catalyst for change at a high velocity. Driver Based Budgeting & Forecasting is an area where you can move fast, start with available data and processes in early use cases and releases and then iterate accordingly as you scale to other businesses, regions and functions while doing it all in the new EPM tool.