As many CFOs and Finance managers would agree, traditional budgeting is most often a tedious and time-consuming process. Even after putting in months of dedicated effort, there are frequent disconnects between budgeting and actual execution. Budgeting and planning strategies that are not in sync can lead to decision-making delays and decelerate business outcomes. With typical finance roles evolving to include operations and decision-making responsibilities, budgeting too has transformed to take on a more business centric perspective.
Driver based budgeting is a futuristic approach that creates models around key business drivers and connects to operational objectives. It is the simple answer to complex budgeting queries and helps finance managers draw an accurate picture of the overall business. With driver-based budgeting, finance is no longer an isolated function, but an important step towards integrated business planning. A quick look at some of the key benefits of this budgeting model.
What does it bring to the table?
- Enhanced productivity: In traditional budgeting, a lot of detailed planning is called for, even in scenarios when that is not required. Driver based budgeting eliminates such un-necessary details and non- productive work. Relieving many business users from creating and maintaining standard departmental spreadsheets, it helps enhance overall productivity of the business.
- Quicker financials: With driver-based models in place, finance teams can quickly and easily develop regular financial analysis. With the financial data organized around the key drivers identified for the organization, understanding and communicating the same to other business functions is a much easier task. In the case of changes in any of the drivers, same can be quickly updated. This also builds in greater agility in the system.
- Better insights: Driver based budgeting also provides much higher visibility with details available in multiple formats and also incorporates multiple levels of detail. With all operational details available within the model itself implies that necessary action can be taken sooner than later, thus empowering organization-wide decision-making.
- Higher accountability: Traditional budgeting creates islands while Driver based budgeting bridges the gaps with a higher degree of accountability and flexibility. With a higher transparency, this model ensures that all contributors are accountable for their submissions. The responsibility in turn ensures better alignment to operational resources and demand.
Leveraging drivers for quality decision-making
Implementing key drivers has some obvious benefits. The higher visibility at multiple levels makes identifying the activities that drive business decisions quite simple. And since most drivers are connected, it enables financial manager to run multiple scenarios for enhanced forecasts. Senior leadership can pro-actively take key decision instead of waiting for things to unfold.
Hurdles to driver-based budgeting implementation
One of the biggest challenges of the driver-based model is organizational alignment. If people do not understand their specific role and accountability within the framework, then organizations may not be able to realize the real value of driver-based budgeting. Secondly, driver-based budgeting is based on the assumption of everything being variable in the short term. This might pose a challenge while accounting for certain fixed-cost elements.
Driver based budgeting is here to stay
Driver-based budgeting is not a new concept, albeit an important one as it enhances the five As– agility, alignment, awareness, accuracy, and accountability by connecting people, operations and financials. The concept is smart and simple, the execution may need some work. There is no doubt that the ‘pros’ far outweigh the ‘cons’ of this model. Also, for bigger organizations, spreadsheet planning is no longer viable. This model empowers businesses by letting data do the talking. With time business tend to get better insights and understand the various working parts leading to quicker and better business decisions. With a technology partner who can deliver transformations on cloud, organizations can avoid un-necessary delays, create a customized solution and reap the many benefits of this model with ease.