According to Gartner, three of the top ten CFO priorities today have to do with how their company develops budgets:
- 80% are prioritizing the development of a planning, budgeting, and forecasting strategy
- 75% want to align costs with growth objectives
- 66% want to improve their budget process efficiency
Clearly, “budgeting as usual” is no longer working for financial leaders today who are increasingly serving as strategic advisors within their companies. They’re looking for more flexible and strategic budgeting methods that their finance teams can use to help the company meet and exceed its targets.
Driver based budgeting is one such method.
In this guide, we’ll introduce you to driver based budgeting, a flexible, strategic budgeting method that can help you unlock faster growth. Then we’ll give you a step-by-step guide on how to successfully implement it in your business.
What is driver based budgeting?
Driver based budgeting, also known as driver based planning, is one of four methods of strategic budgeting. The other three methods are value proposition budgeting, activity based budgeting, and zero based budgeting.
A key component of strategic budgeting is aligning the budget to the company’s strategic goals and objectives while providing the flexibility SaaS companies need to reach their growth targets.
A driver based budget prioritizes drivers that contribute the most value to the business.
Instead of relying purely on past performance data or simple percentage increases, driver based budgeting is a budget based on past operational and financial data and validated with different types of analyses to determine what activities are contributing the most value to the business. Because the process is deeply data-driven, the resulting budget tends to be more accurate than a traditional budget would be.
Once the drivers are identified, they are prioritized in the budget. By doubling down on those activities initiatives known to have the greatest impact on revenue, driver based budgeting effectively accelerates growth. A simple example of this would be an enterprise-focused company focusing more resources on a line item in the budget such as account-based marketing (ABM) because it helps target high-potential accounts.
It’s important to point out that the driver based planning and budgeting process can be applied to any strategic goal or metric you want to improve (e.g. profitability or other specific financial outcomes) in your business. However, because growth is top-of-mind concern for most SaaS companies, our focus here is on how this type of planning process can be used to drive faster growth.
How to do driver based budgeting in 3 steps
Step 1. Identify the growth drivers in your business
A growth driver is a specific activity that can directly impact business performance in a positive way, such as growing the company’s revenue or market share. These drivers could be both internal and external.
Internal drivers are the drivers that matter
These are activities which, if you allocate more resources to them in your budget, will produce a positive impact on the company's financial performance. Examples include:
- Streamlining your onboarding process for new customers, increasing your marketing activities, and improving your business development and/or sales processes can potentially reduce customer acquisition costs (CAC) and increase new ARR.
- Enhancing your customer experience with new training and improved product features can reduce churn and create more opportunities for upselling and cross-selling to increase your expansion ARR.
- Allocating more resources to your R&D teams to enhance existing products and develop new ones can help you capture more use cases and thus a larger share of your market.
To make driver based budgeting really useful, you have to drill down into what activities within each of these areas are actually contributing to growth and which ones aren’t.
External drivers are all the things you can’t control
External drivers may or may not be growth drivers in your business, but they're certainly things you need to think about when developing your budget. They include economic and market conditions, technology shifts, regulatory changes, and significant global events like a pandemic.
While you can't control external drivers, the sooner you become aware of any that might impact your business (in good ways or bad), the more quickly you can adjust your budget if needed, to respond.
How to validate your growth drivers
While you may already have a good understanding of what the growth drivers are in your business, it is important to validate them with historical data.
- Start by looking at your historical growth trends, paying particular attention to any periods of sudden growth.
- Then look at the data for all the different factors that you think might be driving that growth.
This is of course easier to do if your data is all in one place. If not, you can expect that pulling all the data you’ll need from your different systems and analyzing it at the level of detail needed will take quite a bit of time.
If you don’t find the answer to what exactly is driving that growth, you may need to drill deeper. And even if you do, it’s not a bad idea to take your analysis a bit further.
For example, say our goal is (of course) to increase our ARR. With driver based budgeting, you’ll start by looking at the specific drivers that will get you to your revenue target.
For a SaaS business, growth drivers are pretty easy to identify at a high level. they are price, contract length, and customers.
Increasing any one of those might grow your revenue. However, if you were to stop there in your analysis, you might find that increasing price and/or contract length might have negative, offsetting effects such as making it harder to win new customers or losing the customers you have.
This is why it’s important to thoroughly understand your growth drivers at a granular level. This includes both positive and negative drivers. For example, there are six different types of ARR, four of which contribute to growth and another two that work against it.
Step 2. Allocate your resources
Now that you’ve figured out what’s really driving growth for your business, the next step is to figure out how to allocate your available resources across those drivers; where can your dollars have the most impact?
Key considerations in choosing which drivers to prioritize:
- Focus on what you can control: External drivers for example are not something you can change. Focus instead on internal drivers. Those are the activities that will help you move the needle in your business.
- Consider the Pareto Principle: The Pareto Principle states that 20% of the effort brings 80% of the results. Some drivers are more impactful than others. Figuring out the right operational drivers will put you on the right growth path.
You also need to make sure the drivers you prioritize are connected to the larger strategy – a key part of any strategic budgeting process. Driver based budgeting will help you accelerate growth, but if the growth target you’re aiming for isn’t in line with your three-year plan, you may meet your annual target but end up falling short down the road.
While this blog is focused on one strategic goal (growth), if you’re looking at drivers that impact other goals and objectives in your business, it’s important to make sure those goals and objectives are aligned with your company’s strategic plan.
Step 3. Validate your budget
While you can be fairly confident with driver based budgeting that you’re investing in the right things, you may not feel entirely confident in your allocations across them.
This is where scenario modeling can help. It can be cumbersome and error-prone to do using spreadsheets, but with the right software, you can use what-if analyses to test different allocation scenarios.
Modeling leads to more realistic assumptions and thus a more accurate budget. As an example, say you’ve determined that your customer success team is doing a stellar job of reducing churn and you want to increase their budget.
At the same time, you also need to increase your headcount for the sales teams in a couple of different regions because they're having higher success in those regions.
How do you now decide how much to allocate across these different drivers? This is exactly where scenario modeling helps.
Why you should make your driver based budget a rolling budget
Making your budget a rolling budget is another key component of strategic budgeting because it provides the flexibility you need to make changes in your budget throughout the year.
Budgets need to be flexible in order to take advantage of new opportunities as they emerge, to cut your losses if you discover something isn’t producing the results you expected, or to better manage a crisis.
A rolling budget a budget that can be ‘tailored’ to suit the present, instead being rigid and based on assumptions made at the start of the financial or calendar year. With a rolling budget, you can revisit the budget at regular intervals, ideally at least once a quarter, and tweak the allocations as needed.
How to beat the challenges in implementing driver based budgeting
Driver based budgeting isn’t without its challenges, most of which are related to data. Given the data-driven nature of this type of budgeting, if you’re still relying on spreadsheets, gathering all the data you need to identify your growth drivers can be a daunting task.
However, a solution like Drivetrain – a purpose-built platform for financial planning and analysis (FP&A) – can make driver based budgeting easy to implement.
- Data aggregation in real time with seamless integrations: Drivetrain eliminates the challenges of aggregating your data from multiple sources, bringing all your into one platform to provide a single source of truth with the visibility and transparency business leaders need to effectively collaborate on identifying the organization's key business drivers.
- Robust FP&A capabilities: The platform is provides all the capabilities you need for the full range of financial planning processes. In Drivetrain, you can quickly and easily do your financial modeling, generate financial forecasts, and implement any of the four strategic budgeting techniques we're mentioned here. Drivetrain also supports scenario analysis and what if analyses that can help you validate your budget and makes implementing it as a rolling budget simple.
If you count yourself among the 75% of CFOs that want to align costs with their company’s growth objectives, then driver based budgeting may be the best method for growing your business faster.
And, if you’re one of the 66% looking for more efficiency in their budgeting processes, Drivetrain is definitely a solution you should explore.
Contact us today for a demo so you can see how easy it can be to build your budget in Drivetrain!