Driver-based budgeting is having a moment. A growing percentage of CFOs are using the method, maybe 20%, according to The Hackett Group, but many more are exploring it, putting it next to zero-based budgeting, among other approaches, as something that might improve their process. As it’s understood broadly, it’s a way to allocate resources to achieve goals by tying the budget to what drives an organization forward, although how that's done in practice can vary. To understand how DBB looks from one perspective, we talked with Tom Seegmiller, vice president of financial planning and analysis (FP&A) at Vena.

Ramona Dzinkowski: Can you explain what we mean by driver-based budgeting and how it differs from traditional budgeting?

Tom Seegmiller: Driver-based budgeting links real resources and activities to your budget, and most FP&A organizations are striving to achieve that. From my perspective, it really acknowledges that the budget is the articulation of a series of operational items or activities. It's different from traditional budgeting in that it shifts the focus to outcomes, and that's ultimately how you drive your annual budget. It also shifts the focus of ownership from finance to operations and ultimately [to] all parts of the organization, versus traditional budgeting, which tends to be a more finance-heavy activity. 

Dzinkowski: What are the steps in implementing this type of budgeting?

Seegmiller: It's going back to a whiteboard, to be entirely honest with you. But chances are, if you're sitting in the FP&A world, you already probably have a pretty good understanding of what drives the business. It starts with what we think the activities and resources are that push the business forward. Whiteboard out what you think those drivers happen to be. Then you're going to have to build a model that yields a financial output. The first time can be very challenging for organizations. So, I think it's really important to acknowledge that you're not going to necessarily have measured all of these metrics historically and you won't necessarily have a database to draw on. These metrics will need to be built up based on monthly operational reviews; you’ll have the opportunity to refine your inputs during future iterations of your forecasts. 

Dzinkowski: What are some of the other challenges involved in DBB? 

Seegmiller: The biggest challenge is that getting all the data and factors to consider can be time-consuming. However, one of the greatest outcomes to expending all of that time and effort from an FP&A perspective is that you get an intimate understanding of the internal operations of the business. This allows you to spot many more opportunities and risks, and helps to either mitigate those risks or capitalize on those opportunities. It ultimately acts as a catalyst for budget owners to be calling on the FP&A team for their insightful, value-added insights. 

Dzinkowski: How can DBB impact working capital efficiency? 

Seegmiller: If you think of a quote-to-cash process in a business-to-business (b2b) environment, for example, you need to understand the drivers that will ultimately lead up to a sale. For example, how many leads need to be generated? What activities need to be undertaken by sales? What is your typical time to close a sale? Those sorts of things are going to drive your timing of sales. So, if you understand how an opportunity ultimately moves through your sales funnel, it should give you a really good indication of when your finance team can start to begin their collection process. Then you're going to layer on driver-based activities like time-to-collect against accounts receivable (AR) balances to ultimately forecast your cash flow.  

Dzinkowski: What are some of the less tangible benefits resulting from the DBB process?

Seegmiller: Creating these drivers forces a great deal of collaboration within the business and also forces you to formulate better plans as to how to improve those metrics in the future.  Constantly measuring these metrics, or drivers, that you're loading into your plan, and understanding what the business is doing day in and day out, will improve your assumptions and get a tighter plan that more accurately represents reality.

Dzinkowski: How can this help CFOs manage costs at a time when this is top of mind for them? 

Seegmiller: What it can do in terms of rationalizing dollars is help make sure you're placing your investments in the areas that yield the greatest return for the organization. Instead of deploying cash broadly and hoping it yields, CFOs can place more targeted investments through having a more intimate understanding of how their investments will materialize. Through targeting specific drivers, it’s easier to run multiple scenarios to ultimately determine what creates the best outcome and permits a CFO to more easily navigate a cash constrained environment. 

Dzinkowski: What are the top four things CFOs need to understand about DBB? 

Seegmiller: First, I think CFOs need to realize that DBB massively increases predictability in your business and that’s a huge factor. Second, they’re going to shift the ownership of the budget from a finance-owned activity to a business-owned activity and this increases buy-in within the business. Third, it's going to elevate your finance organization, because you’ll have a much deeper understanding into actual operations. Finally, it's going to be much easier to complete your analysis on a regular basis. Traditional budgeting feels like you just happen to have a number in a period, and that's the budget. In driver-based budgeting, when you've thoroughly documented your assumptions and how you created that budget, it's way easier when you get six months into the year to explain any variances. You're looking at those underlying details and it’s thorough enough that you can say, “Here's what's diverged from plan, and here’s the exact impact on the business.”