How can you use driver-based forecasting for better accuracy?

Driver-based forecasting introduces two critical accuracy and efficiency aspects in to the holistic enterprise performance management process- 1. It eliminates subjectivity and bias by anchoring determination in formally identified relevant metrics that are attributed pertinent values; and 2. Maintaining the drivers and its values current, keeps the entire process anchored in realism and agility.

Consider this: drivers, the underlying events that influence key performance indicators, are constantly evolving. Understanding these drivers empowers FP&A professionals to not just react to change, but to anticipate and influence them. By strategically allocating resources towards initiatives that address key drivers, FP&A gains the ability to control the ultimate outcome, steering the company towards achieving its long-term goals. This proactive approach ensures the organization is adaptable and well-positioned for sustainable growth, even amidst a changing landscape

Enhanced agility: Driver-based forecasting allows for quick adjustments to changing market conditions and business dynamics, enabling companies to stay agile and responsive. Resource optimization: By identifying and focusing on key drivers of performance, organizations can allocate resources more efficiently, maximizing productivity and profitability. Risk mitigation: Through the identification and analysis of critical drivers, companies can proactively identify and mitigate potential risks, ensuring more robust financial planning and risk management strategies. Also help in Scenario analysis and Performance measurement

Identified drivers based forecasting should quantified by collecting historical data and analyzing their relationships with the business performance metrics (e.g., revenue, expenses, profits). And use of statistical techniques such as regression analysis to determine the strength and direction of these relationships.

Here are great examples of driver based forecasting: Headcount by person and new hire req Marketing spend by purchase order Revenue by customer Capex by purchase order

Best Practices for Driver-Based Forecasting: Identify key drivers: Pinpoint factors influencing business performance. Gather accurate data: Ensure data quality and consistency. Validate assumptions: Verify assumptions with research and analysis. Establish clear relationships: Define cause-and-effect links between drivers and outcomes. Implement dynamic models: Develop flexible forecasting tools for real-time adjustments. Collaborate cross-functionally: Involve stakeholders for a holistic view and cooperation. Monitor and adjust: Regularly review performance and refine forecasts accordingly. Communicate effectively: Clearly explain methodologies and impacts to stakeholders.

I think the biggest mistakes by companies over the past 2 years has been because they were OVER relienat on driver based forecasts and literally followed them blindly - case in point Add Headcount and more revenue will come. Wrong - most companies simply decreased rep territoroes to accomodate for more headcount. The REAL driver is increased pipeline - increase the size of the pie, don't cut the existing pie into smaller pieces.

Data availability and quality: Limited access to reliable historical data or inaccuracies in data can hinder the accuracy of forecasts. Complexity of relationships: Identifying and quantifying the complex relationships between drivers and financial outcomes can be challenging, especially in industries with multiple interconnected variables. Assumption risks: Forecasting relies on assumptions about future events and trends, which may not always align with actual outcomes, leading to inaccuracies. External factors: External factors such as regulatory changes, economic shifts, or geopolitical events can significantly impact driver-based forecasts, introducing uncertainty and volatility.