Lower your blood pressure with value driver based planning
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Lower your blood pressure with value driver based planning

The boom in wearable fitness tech is gathering pace, as consumers track their health and improve future performance. But many organizations are slow off the mark when it comes to using critical data to guide and power their next steps.

Worldwide consumer spending on wearable devices hit $81.5 billion last year – up 18.1% on the year before, according to Gartner. Innovation is advancing at speed. In fact, Gartner predicts that by 2024, miniaturizing capabilities will mean that 10% of all wearable technologies will become unobtrusive to the user.

But there's a key principle at work here that corporate enterprises mustn't miss: Consumers crave information that's relevant, timely, and can provide them with actionable insights. Each piece of digital information feeds into their overall picture of health. It helps them to decide whether to adjust their diet, schedule an extra gym session, or book a place in an upcoming competition.

This highlights an uncomfortable truth: financial leaders sometimes rely on old and irrelevant information when planning for their companies' futures. Surely there's a better, more accurate way to forecast results, create vital business plans, and shape budgets? Fortunately, there is, and it involves key value drivers.

Understanding your financial drivers     

It’s essential for every organization to discover what most influences the business and drives performance, especially in changing times. As the starting point, you need to understand and focus on the key levers for your business. These are known as your value drivers.

Key value drivers are controllable operating factors within your business that can have a significant impact on financial performance. They can be variables such as your sales volumes, numbers of customers, and sales price per unit.

Building a picture of your organization's finances and trajectory requires developing a value map of your business that really captures how these key value drivers are linked.

Just like the human body, your map is made from dozens of moving parts. Everything in your business is interconnected within one system. A small change in expenditure, for example, is very likely to alter other numbers across the business and may even impact revenue.

Of course, recognizing these inter-connections gets super-complicated. Despite best efforts, it’s impossible to keep all financial value drivers in mind or in a single Excel file. But the business requires the identification and manipulation of key value drivers to enable accurate simulations and scenario-based planning.

Fortunately, the right financial planning and analysis (FP&A) tools can help you to identify your financial value drivers and define how they relate to each other.  When something changes, you'll see the crucial implications ripple out instantly across the rest of your business.

Driver based forecasting: Where to begin

Although it may feel daunting at the start, identifying your key value drivers, how they interact, and what driver based planning can do for your business begins to make sense quickly. Here's how one organization might choose to begin its journey:

  • Step 1: Financial planners add value drivers for the previous year's materials costs and this year's expected inflation. They can then see the likely impact on profitability as expenditure rises.
  • Step 2: How high would the company need to raise prices or how many extra units would it need to sell – to offset the predicted inflation and protect its profitability? Planners can add financial value drivers for price and quantities to get the answers.
  • Step 3: The company may want to set ambitious sales targets. But if the business sells 20%, what will this mean for bonuses, commissions, and discounts? Here are another three key value drivers that need plugging in.
  • Step 4: To raise its game and take on an emerging competitor, the company may want to hire more salespeople. But what will this do to the salary bill? And if another 10 people are hired, what about the additional office costs? All the time, more key value drivers need bringing into play.
  • Step 5: If sales take off, what about the impact on freight costs? And if staff in the warehouse need to work overtime, what are the implications in terms of keeping the lights on for longer? Again, financial planners need to see all the financial drivers interacting correctly.

The value of driver based planning

Adding key value drivers and watching how they impact each other and the business has major benefits. Here are three big advantages:

1) What's most important stands out 

The exercise of identifying and understanding value drivers can have a profound effect on your business. Even though there are countless figures floating around in your reports, you can trace the key numbers back to the source –  your most influential financial value drivers, which may be cost centers or profit generators. These are the ones that are critical to driving business success. And this can lead to a refreshing focus on what matters most within your operation.

2) You can adopt driver based budgeting

With a single version of the truth at the heart of your planning, you'll see the real picture of your finances and how you compare to previous periods. Realistic forecasts based on fresh data and previous records let you project long-term trends for revenues and costs. This instills greater certainty and confidence as you follow driver based budgeting. As new value driver data becomes available, you can update your assumptions and create rolling forecasts. This approach increases organizational agility.

3) You can run trustworthy simulations    

With driver based forecasting up and running, you can run best-case and worst-case scenarios simply by altering some of the value drivers. Within moments, you can see the implications ahead of time. That might mean you take early, mitigating action if the actual figures start leaning in the wrong direction, or be ready for extra resourcing, should an opportunity for rapid growth become apparent. And everything is visible from the convenience of your web browser.

Discover more about key value drivers     

Unit4's FP&A team can help you find the right value drivers for overall planning and partial plans, as well as your profit and loss statement, balance sheet, and cash flow statement. Over time, artificial intelligence will learn about your business and provide guidance to improve your results.

When everything is connected and rolling forward, your organization can gain a substantial competitive advantage through effective driver based planning, keeping you at the peak of business flexibility and agility.

Find out how Unit4 can help you to take advantage of value driver based planning by visiting our FP&A page or watching this video.