Financial modelling terms explained

Driver-Based Planning

Driver-based planning is a method of planning that involves the identification of a wide range of relevant internal and external factors that may have an impact on the future success of a business.

What Is Driver-Based Planning?

Driver-based planning is a technique used in financial modelling that helps to identify and track the key drivers of a company's profitability. By understanding the drivers of profitability, managers can focus on those areas that have the greatest impact on the bottom line and make decisions that will improve profitability. Driver-based planning involves identifying the key revenue and expense drivers of a company and then building a model that links these drivers to profitability. This can be done by creating a series of equations that show the relationship between revenue, expenses, and profits. Once the model is built, it can be used to test different scenarios and make decisions about how to improve profitability.

How Do You Perform Driver-Based Planning?

Driver-based planning is a technique for financial modelling that uses drivers to predict future outcomes. Drivers are factors that affect the outcome of a particular financial metric, such as revenue or profit. By predicting how drivers will change in the future, you can create a model that predicts how the financial metric will change. This technique is particularly useful for long-term forecasting, as it allows you to account for changes in drivers that may not be predictable in the short term.

Who Uses Driver-Based Planning?

Driver-based planning is used by companies who want to understand how changes in their business drivers will impact their financial performance. It allows managers to isolate the impact of specific drivers on profit and loss, cash flow, and balance sheet items. This information can then be used to make strategic decisions about where to invest resources and how to grow the business.

What Are Some Examples of Drivers?

Some examples of drivers are company revenue, company profit, company debt, company assets, and company equity. Other examples of drivers are economic indicators such as GDP, inflation, and unemployment. Political factors such as tax rates, government spending, and trade policy can also be drivers.

What Do You Have to Watch out for When You're Performing Driver-Based Planning?

Driver-based planning is a key component of financial modelling, and is used to forecast future cash flows and asset values. In order to perform driver-based planning effectively, you need to be aware of the following:

1. Make sure you have accurate drivers for each line item in your forecast.

2. Be sure to use the right time horizon for your forecast.

3. Make sure your drivers are realistic and achievable.

4. Use sensitivity analysis to test the impact of different drivers on your forecast.

5. Check your results against historical data and market trends.

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