What are the benefits and challenges of using a driver-based approach for your rolling forecast?

1 What is a driver-based approach?

A driver-based approach is a method of forecasting that identifies the main drivers of your business and how they affect your revenue, costs, and cash flow. Drivers are the variables that influence or determine your financial results, such as sales volume, price, customer retention, productivity, or quality. By using drivers, you can simplify your forecast model and make it more responsive to changes in your business environment. You can also align your forecast with your strategic goals and initiatives, and communicate them clearly to your stakeholders.

2 How to choose and define your drivers?

Choosing and defining your drivers is a critical step in creating a driver-based forecast. You need to select the drivers that are relevant, measurable, and controllable for your business. You also need to define how each driver relates to your financial statements, such as income, balance sheet, and cash flow. For example, you can use a formula or a ratio to link a driver to a financial line item, such as revenue = sales volume x price. You can also use historical data, benchmarks, or assumptions to estimate the values of your drivers.

3 How to update and monitor your drivers?

Updating and monitoring your drivers is another essential step in maintaining a driver-based forecast. You need to collect and analyze the actual data of your drivers on a regular basis, such as monthly or quarterly. You also need to compare the actual data with your forecasted values and identify any variances or trends. Based on the analysis, you can adjust your forecast assumptions and projections accordingly. You can also use dashboards, reports, or indicators to track and visualize your drivers and their impact on your financial performance.

5 What are the challenges of using a driver-based approach?

Using a driver-based approach for your rolling forecast can also pose some challenges to your business, such as difficulty and time-consuming in identifying and defining the relevant drivers. It can also be complex to link and integrate the drivers with your financial statements, as well as risky and uncertain to estimate and update the values of the drivers. Additionally, it can be demanding and costly to collect and monitor the data of the drivers. All this requires a thorough analysis of your business model, value proposition, and competitive advantage, as well as formulas, ratios, or rules that capture the interrelationships among the drivers and financial line items. Furthermore, you may need to use historical data, benchmarks, or assumptions that may not reflect the current or future reality of your business environment.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?