- Effective forecasting is important to making smart business decisions that will increase the value of your organization.
- Driver-based decision-making is a financial planning method that allows you to analyze how changes to various factors can impact performance.
- Focusing on key drivers of business success that are aligned with strategic goals can enhance financial forecasts and produce more efficient resource allocation.
Business owners and leaders spend nearly 40% of their time making decisions, according to McKinsey research. What’s more, inefficient decision-making can cost a typical Fortune 500 company around $250 million annually.
With such a significant portion of time dedicated to decision-making, effective forecasting is key to making smart decisions that will increase the value of your organization.
When it comes to forecasting, static spreadsheets will only get you so far – and they’re time-consuming to update and more susceptible to error. Adopting software-assisted, driver-based decision-making will allow you to quickly and efficiently analyze how changes to different variables can impact your forecast.
What is Driver-Based Decision-Making?
Driver-based decision-making is a financial planning method that supports your organization’s goals by focusing on the critical factors that significantly impact its performance and success. It allows you to prioritize critical metrics and variables and see how they affect financial results.
For example, in a nonprofit setting, driver-based decision-making means strategically aligning resources with the key factors that create the desired goals. If a specific program is proving highly effective, you might consider expanding it, while also leveraging data on donor segments to tailor fundraising efforts.
Why Driver-Based Decision-Making Matters
In the past, traditional forecasting often relied on broad assumptions and general trends, which overlooked the nuanced factors that truly drive performance. Data was typically only analyzed a few times a year unless significant events occurred.
Driver-based decision-making is essential because it allows your organization to make decisions based on the factors most significantly impacting your business – in real-time. By focusing on the key drivers of performance, you can better understand your operations and make informed decisions that drive growth and profitability.
Some of the critical benefits of driver-based decision-making that can help increase the value of your organization include:
- Adaptability: Today's driver-based decision-making provides a dynamic and adaptive forecasting method. Even with ever evolving factors like market trends, consumer behavior, or economic conditions, you can quickly change your forecast because this agile financial planning method focuses on the drivers that most significantly impact your organization.
- Efficiency: A driver-focused approach ensures that your resources are directed toward initiatives and activities that substantially impact your overall goals. This resource allocation enhances efficiency and maximizes the return on investment, allowing you to achieve more with your resources.
- Strategy: Driver-based decision-making also enables you to take a more strategic approach to financial planning. You can see how changes to different drivers will affect your organization in the short- and long-term and then plan accordingly.
- Collaboration: A strategic focus on key drivers opens the door to more transparent communication and collaboration between your employees across different departments. Teams can align their efforts toward common objectives based on a clearer understanding of the drivers critical to your organization's success.
How Driver-Based Decision-Making Can Be Helpful
This future-focused approach will help your organization identify the factors that truly matter rather than relying on guesswork or anecdotal evidence. Ultimately, driver-based decision-making increases the value of your organization by helping you optimize your operations, improve financial performance, and stay ahead of the competition.
At Eide Bailly, we’ve found that businesses that use driver-based planning have a better understanding of how their strategic decisions impact financial results – leading to more successful initiatives and achievement of their goals and objectives.
According to a survey conducted by the Aberdeen Group, organizations that adopt driver-based planning have experienced a 24% improvement in forecast accuracy and a 21% reduction in budgeting cycle time.
What does this look like in action?
A healthcare provider used driver-based planning to optimize their resource allocation. By analyzing the impact of different drivers on their revenue, such as patient volume and reimbursement rates, they were able to identify areas where they could improve efficiency and reduce costs. As a result, they improved their operating margin by 10% and provided better patient care.
Improve Your Strategic Planning
Effective forecasting is crucial for making smart decisions that add value to your organization. However, using static spreadsheets for forecasting is not enough, as they are time-consuming to update and prone to errors.
Instead, using software-assisted, driver-based decision-making can help you quickly analyze different variables and their impact on your forecast, saving valuable time and resources while boosting your organization's value.
If you’re unsure about your organization’s business planning and analysis capabilities, you’re not alone. Many organizations lack the time, expertise, and resources to effectively tackle driver-based decision-making, but an experienced team of advisors can help.