Driver-Based Budgeting vs. Driver-Based Planning
I am pleased to say that when I now google “Driver-Based Planning: How is it Defined?” the organic search points to the earlier blog post by that name. However, this proposed definition of “driver-based planning” actually created more of a stir in the finance community than I had anticipated. I have been thinking a lot about this “driver-based” thing and thought I’d share the latest thinking after returning from a trip to San Diego where I got to present “The Planning Maturity Curve: Where Are You? Where Do You Want to Be?” as part of the ASMI Budgeting and Forecasting Summit.
I am working on an improved definition that should resonate with the thought-leaders and begin a conversation to create simple, doable steps to improve business performance in organizations of all sizes. While my goals may be lofty, if you keep reading, and participate in this discussion, we might just end up with an HBR article and a new movement for management consulting to tackle.
The terms “driver-based budgeting” and “driver-based planning” are often used interchangeably. This ambiguity is the impetus for this week’s blog.
Let’s begin with a pretty good definition I’ve seen proposed elsewhere: “Driver based budgeting is an approach for simplifying, expediting, and improving the budgeting process.”
It’s easiest to understand driver-based budgeting by looking at an extreme example of what is not driver-based budgeting. Imagine a budget where every manager not only enters in dollar amounts for expense items such as travel and supplies, but also enters the base salary, payroll taxes, and benefit costs by employee. They do so by typing in dollar amounts or looking up the value in a table for each and every employee. You can imagine that travel expenses are entered as dollar amounts for various trips broken out by airfare, hotel, and the like. The numbers are all added up and that makes the budget. The point is: there is no multiplication happening in this budget process, and a budget without multiplication is not a driver-based budget. If you read between the lines, you also get the impression that this budget is fairly detailed with dollar amounts for every single expense item. In fact, it is the goal to be precise and enter in the exact estimate (how’s that for an oxymoron?) of each expense item, which will be more accurate if it is built “bottoms-up”…
Driver-Based Budgeting Simple Definition
A budget that is highly driver-based would have multiplication.
For example, in a more driver-based budget, payroll taxes might be calculated as base salary multiplied by a set payroll tax rate. Depending on the industry, variable costs may be “driver-based”; for example, cost of goods sold might be multiplied by a dollar amount per unit sold.
The thing that makes it “driver-based” is simply the mathematical fact that the budget is partially derived using multiplication. The more multiplication in the budget, the more it is driver-based. You know you are moving to a driver-based budget if managers enter things like:
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(number of conferences attended) x (average cost per conference),
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(number of beverages ordered per table occupied) x (number of tables occupied),
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Etc.
As a general rule, minimizing the number of inputs and maximizing the number of linked (automated/calculated) relationships will optimize the driver-based budget model. Optimizing the driver-based budget reduces errors simply by requiring fewer manual inputs, and it saves time since calculations happen more or less instantaneously. If you are able to leverage a Unit-Rate-Amount architecture, then you will be able to clearly see the driver relationships. Better visibility into the numbers is generally very important to management. Moreover, as noted in “Causal Analysis”, a Unit-Rate-Amount structure enables you to answer the question “why the variance” by breaking out the impacts of units and rates on the variance amount.
So, “driver-based” can be roughly translated as “has multiplication.” Now we are left with the terms “budgeting” and “planning”. If we can agree that budgeting and planning are different, then we can now agree that driver-based budgeting and driver-based planning are also different.
Before we go onto driver-based planning, let’s conclude with a better definition of driver-based budgeting.
Driver-Based Budgeting Better Definition
A budget is driver-based to the extent that it makes use of multiplication and therefore incorporates automated calculations that assume certain factors are multiplied together. Driver-based budgeting is important since it can be used to “simplify, expedite, and improve the budgeting process” as noted earlier. So, if done properly, a driver-based budget will streamline and improve the budget process; however, keep in mind, we’re still talking about budgeting here. I am taking it as a given that the budgeting process does not improve your organization’s bottom line. Therefore, the success of driver-based budgeting is measured by time saved not better business decisions.
Preview of the new definition of Driver-Based Planning: The new definition of driver-based planning is most easily differentiated from driver-based budgeting by simply looking at the outcome: improved profitability and cash flow. Driver-based planning is not something we need to do faster; driver-based planning is something we need to do better, including more often to support best practices such as agile planning and rolling forecasts.
