Driver based forecasting explores the human side of projections much deeper. In traditional strategic planning, virtually every leader has targets and objectives to meet in support of adding worth to their organization (such as adding profit, supporting growth, or minimizing risk).
Key Performance Indicators (KPI) are the institutionalized barometers of success specific to those activities and the underlying goals. Simply put, driver-based forecasting are the projected events that must occur to achieve those targets.
Driver based forecasting is unique in that it decomposes costs and revenues into independent but associated elements to emphasize the relations between operations, customers, people, events, and the financials. It is formulaic by nature, and some organizations can go quite deep in their decomposition of drivers. At FYIsoft, it is our belief that many organizations can start simple just by thoughtful consideration of how costs or revenues are born.
Let’s start with a simple demonstration and practical example.
Postage for a marketing department.
We all know that postage is a pretty typical expense for any organization that doesn’t exist in a cave or have any interaction with the rest of the world. But stop to think about how postage costs may come about.
First, let’s explore Volume – how often and how many pieces of mail will go out in a specific period. Different departments and operations may have planned cycles and campaigns that support a particular strategic outcome. Here we have seasonal direct mailing plans tied to a strategic product release schedule, and that plan is tied to a customer list. April, August, and October are the planned mailings, and the customer list suggests 130,500 customers, growing at a 5% rate per quarter. So we now have a pattern and part of a driver.
Part two would be unit cost. Currently, USPS Postage rates is $0.36 for first class mail. But….is expected to increase to $0.38 cents on September 1st. Starting to see the power of this? Two independent elements that will play together to drive a cost. And the power comes with the ability to ‘play with’ either piece of the driver to see the outcome. Think of this as ‘mini scenario power’.
Budgets can benefit from driver-based forecasting because the convergence of activity and cost have both a degree of independence from one another, and engaging operations and business partners on the activity is a strong model to drive accountability to the end result. Gone are the days where Finance is charged by business partners as ‘dreaming up our numbers’, and thus department leaders feel no accountability to operating to their budget.
Having driver-based forecasting capability built right into a cloud based, centralized budgeting module that integrates perfectly with financial reporting is a perfect design to support efficient and transparent budgets.
In addition, adding driver-based forecasting to your accounting bag of tricks doesn’t mean you have to become the de facto CFO that is in the ear of the CEO all day on what he or she should do at every turn — although it can help if that’s what you’re aiming for! The value creation is simply elevated by linking your goals to data-driven financial reporting and financial analytics tools such as those offered by FYIsoft.
For more information on how FYIsoft can help you create more value through the utilization of our suite of products, do not hesitate to reach out to us by clicking here.