When it comes to your annual budgeting and forecasting processes, do any of these statements sound familiar?
It takes too long.
It’s already out of date before it’s even finished.
It doesn’t help me track any real objectives.
For most of you, the answer is likely a resounding ‘yes.’
The traditional budgeting and planning process has its fair share of complaints from CFOs and budget managers. And the issues above aren’t the only ones that often come up again and again.
The fact of the matter is, traditional methods of budgeting and planning aren’t cutting it anymore.
Today, organizations need to keep up with the rapidly changing business cycle. They have to know the key performance indicators (KPIs) that are essential for their business and how to react to them.
Finally, businesses want to be more agile. Managerial teams have to keep up with shifting market trends and make critical decisions on the fly.
Is it any wonder many organizations are moving away from traditional methods and into smart budgeting opportunities like driver-based planning?
Understanding Driver-Based Scenario Planning
Many organizations fail to take control of their long-term financial futures with the budgeting and planning process. There can be a disconnect between what the numbers show and how operational strategy moves forward.
A system like driver-based planning helps to remove that disconnect.
Driver-based planning is an approach that focuses on a set series of KPIs and drivers that actually matter. Once these drivers are identified, models are created around them. The models are tied into the overall operational strategy and used to analyze and predict future performance.
Implementing a driver-based planning system will not only streamline your budgeting process, but will also help with strategic planning over the long run.
Best Practices For Driver-Based Planning
If you’re considering using this smart budgeting method, there are a number of best practices you should keep in mind.
The primary goal with driver-based planning is to provide a snapshot of where your organization is in an instant and use that to plan for the future. While it’s easy to have your list of drivers veer into the hundreds, it’s much more efficient to limit them.
Find only those 10-20 drivers that genuinely matter, and focus primarily on those when developing strategy, running scenarios and making business decisions.
Review and Adjust
With the speed at which the market changes, today’s budgets and forecasts have to be living, breathing things. A key driver today might be ineffective or replaced by a better data set six months down the line.
Because of that, be sure to set aside time during the year to review and adjust your drivers. It could mean swapping out drivers or merely tightening the number over time.
Collaborate Between Stakeholders
A significant benefit of the driver-based budgeting system is that it can be much more collaborative than traditional methods. This system can often result in a better overall understanding of key strategy.
Embrace this benefit by having each department play a part in determining their key drivers. Organizationally, this can help people feel like they are stakeholders in the process as well as providing better information.
Have a System in Place
For a smart budgeting system of any kind to be effective, you need to have a system in place that can handle it. Spreadsheets are not only risky to the budgeting process, they just can’t manage complex budgeting effectively.
Instead, invest in a system that can handle data, reporting and security efficiently and in real time.
Shorten the Cycle
With driver-based planning, long extended budgeting cycles should be a thing of the past. Most organizations today recognize the speed at which the market is moving and have shortened their cycles to 30-40 days.
With the right systems in place, a shorter and more effective budgeting and planning cycle is attainable and will help ensure your budgeting is not out of date.
As you can see, driver-based planning is one way to embrace smart budgeting. Hopefully, an understanding of the concept and a few best practices will help you determine if this system is right for your organization.
To learn more about how to simplify your 2018 annual budget, sign up for our webinar on October 19. In it, you’ll learn how your organization can get rolling on a new smart budgeting system in just 40 days.