10 mar. 2022

5 tips – Get Started With Driver-based Revenue Forecasting

Med Planacy arbetar ni mer effektivt och datadrivet med era budget, prognos och planeringsprocesser.

What is a driver, why should you work driver-based and how do you get started with revenue forecasting? In this article I explain what a driver is, give some examples of drivers for different kinds of revenue, as well as 5 tips on how to get started with driver-based revenue forecasting!

What is a driver?

First, what is a driver? Drivers are the parameters or key figures that drive the company's or business's revenue or expenses. Finance departments often work in terms of accounts and account groups, while the rest of the organization works with drivers. In example, a sales department works with drivers in the form of volumes and prices, while HR usually thinks in terms of monthly salary, employment rate and the like. Some finance departments (mainly controllers and finance managers) also work with a driver-based perspective, in example when it comes to budgeting and follow-up processes – though it’s far from everyone. After reading this article, even those of you who aren’t really “there yet” will understand why we recommend a driver-based work process.

Examples of different revenues and drivers:

Service-intense revenue

Drivers: Staff (quantity or per individual), degree of charge, degree of employment, average price per hour and number of hours

Subscription-based revenue

Drivers: Customer base, churn, annual recurring revenue and net revenue retention

Production-based revenue

Drivers: Volume, price

Transaction-driven revenue

Drivers: Transactions, average revenue / transaction

Why should you work driver-based with your revenue budgeting?

The answer is simple – to simplify the work process for everyone involved. By working driver-based with well-known concepts that the business is familiar with, those who provide input to the forecast (and are usually not economists) will find it both easier and more fun. By simplifying for those who provide input, you can also improve the quality since those who provide input are in fact the ones who have the best insights about their specific areas.

The goal of working data-driven should be to make everything work everything work together in a cohesive flow, like the image above. In this way, you get a constantly updated overview of the impact of various factors on both the result and the cash flow. It becomes easier to work with scenario planning and continuous planning, which means that you’ll constantly have an updated view of the impact the outside world might have on your future!

5 tips to start working driver-based:

Identify a few drivers – the most critical to your business. What are the cornerstones of your revenue?
Involve the rest of the organisation - Which drivers do they prefer to work with? Is this in line with how you want to steer the organisation forward? Also, remember that it’s important that the organisation receives the training needed in your new way of working.
Secure a flow between drivers - Are different drivers dependent on each other? What flow is needed between the different drivers?
Get a system for budgeting and forecasting – Avoid manual labor and secure an automatic flow.
Expand the data-driven work with your planning processes - Once the organisation has started to work driver-based with the revenue – do the same thing with your costs!

By working driver-based, you’ll get an automatic flow where the budget or forecast becomes a tool for the entire organisation, and where the financial planning is based on operational input. As mentioned above, you’ll simplify the work process for everyone involved and increase the quality of your budget/forecast.

If you’d like to know more about driver-based revenue budgeting and forecasting, you’re welcome to book a free consultation with me or one of my colleagues!

Author

Mikael Edh
CPO Planacy
mikael@planacy.com
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