5 Best Practices to Benefit From Driver Based Modeling

As market uncertainty and volatility become undeniable, the need for accurate financial planning and analysis (FP&A), becomes vital for business success. An essential tool for in depth analysis, for instance, is Driver-Based Modeling (DBM), an approach that identifies the key factors of the business equation to help predict and shape the final outcome.

According to Joseph Denk, Financial Consultant at Innovergent, the best practices for DBM are recurring inquiries from our clients. “It is becoming more and more important for clients to understand their business drivers, internal and external, and once understood, the ability to complete what-if analytics on these drivers are a major key to success,” he explained.  

Once your company has successfully implemented DBM, it’s important to keep in mind the best practices to get the most out of it. Let’s break those down.

The main point of DBM is to find the minimum set of drivers that are affecting your company’s financial outcomes and build a simple model to show the effect of these drivers. Because this model is also about testing, several pieces will be discarded along the way, until you find the elements that need your attention.

For this model, each additional driver adds to its final weight, making it more complex and heavier. This is why it is important to only keep the information that adds value, as the more elaborate your model gets, the harder it becomes to make the appropriate changes in a timely manner.

Linking your financial strategy to the planning process is essential for successful businesses. DBM should not be an isolated tool, but it should be a part of the bigger picture, along with other parts of the analysis cycle. In addition to DBM, successful companies have adopted rolling forecast methodologies to better understand the market.

Even though Excel has been a helpful tool to facilitate analysis and financial forecasting, recent reports have taught us about the limitations that using old-fashioned spreadsheets could bring to companies. New alternatives such as cloud-based solutions have demonstrated to improve analysis accuracy and provide easier ways to collaboratively plan and forecast revenue.

Finally, companies have found success through identifying areas where DBM is already happening within the organization. Once these areas have been identified, they focus on enhancing and systematizing this modeling, which become essential parts of planning, reporting and analyzing.

Not sure if Driver-Based Modeling is right for you? Contact us to start a conversation around solutions that will help you save money and increase efficiency!