Knowing where you stand and where you’re headed at all times is a critical aspect of running your business.
Driver-based modeling gives you the forward visibility necessary to clearly see what’s coming by allowing you to be more sophisticated in your financial models.
While driver-based modeling can also save you time, this type of model—based on changes to the business’s key drivers—has benefits far beyond efficiency. Your forecasting can progress from high-level, rough planning using ratios and past performance, to future-focused detailed models reflecting actual upcoming changes in the business.
Allow your planning cycles to advance from mostly static models, done once a year or once a quarter, to continuous, driver-based planning.
What is Driver-Based Modeling?
Driver-based modeling is a method of forecasting and planning in which the model takes key factors (or drivers) into consideration in order to create a realistic projection about where the business is headed. The model works with the operational links between multiple factors and how they affect various areas of your business operations.
Instead of focusing solely on KPIs, you can focus on your input assumptions and how changes in your assumptions affect your results.
You know the targets you want (or need) to reach. Instead of planning your KPIs, create a model based on your key drivers and enter the business inputs necessary to reach those targets.
Links you’ve created between different drivers let you see what the impact of changes in one area means for another. For example, reducing customer churn rate while keeping the same level of new customer acquisition means growing your customer base. This generates more revenue, but it also means more support staff is necessary.
Bottom line, reducing your churn and increasing customers means you’ll need to hire more support staff. More support staff also creates higher salary costs, impacting your operating expenses.
Driver flow example
On the other hand, perhaps you’ve determined that increasing customer service and support staff improves churn. At what point is the additional salary expense offset by the increased revenue from better customer retention?
Driver-based modeling allows for easy modeling of these “what-if” scenarios.
Scenario Modeling
Sticking to the previous example, does decreasing customer churn alone improve the net result enough that the business meets its targets? Or is it also necessary to hire additional sales resources and invest in more marketing campaigns?
In a high-growth business the question may not be if more sales and support staff should be hired, but when. When does it make financial sense to add salespeople and customer service representatives? How many do we need to hire each month in order to meet our goals?
Modeling the answers to these questions for yourself can help you anticipate what’s on the horizon. Running through a variety of scenarios helps you make better-informed decisions for the good of the business.
The Challenge with Excel Models
While Excel models and spreadsheet-based plans can be extremely flexible and used to create even the most complex models, they’re typically very fragile and difficult to use in fast-moving business environments.
Common issues include:
- Difficult to find and update key assumptions, putting the model at risk of breaking when trying to scenario test or even update
- Nested formulas are built in several layers on top of a single assumption
- No integration with actuals makes budget vs. actual comparisons and updating forecasts very time consuming, while adding risk in the form of introducing errors
- The effort required to update models often causes organizations to forego updating and lose key business insights for long periods of time
- Typically, only a single individual knows how a model was built or how to update it
Excel models tend to be great during the initial planning phase but fall short quickly when trying to put them into practice for actually operating and measuring the business.
Case Study: Leveraging Driver-Based Planning Software
Recently, ClosedLoop—a fast-growing, venture-funded startup that provides a data science platform for the healthcare industry—leveraged driver-based modeling software to its own advantage. ClosedLoop used driver-based modeling to maintain the flexibility of a spreadsheet but gain the speed and reliability of actual planning software while integrating with their QuickBooks software.
Like most early-stage companies, ClosedLoop initially utilized Excel for its financial planning, hiring a part-time CFO who tracked growth and explored what-if scenarios in the spreadsheets. But even with the part-time CFO managing the sheets, ClosedLoop CEO and founder, Andrew Eye, had concerns about the fragility of their system.
“Our financial planning sheet was brittle—I was constantly terrified that someone would make a mistake in a cell and break everything,” said Eye. “It was also near impossible to compare scenarios. Comparing plan to actuals was a manual process that just can’t be done easily or effectively with Excel.”
When the part-time CFO left, ClosedLoop was left with two options: hire a full-time CFO who could continue managing and manually updating the model in Excel, or find a technology that could do it for them.
Ultimately, ClosedLoop partnered with Jirav to achieve fast value while putting off the full-time CFO hire. Drawn to Jirav because of its drivers, engine, and flexibility, ClosedLoop was able to work with the Jirav team to build their initial financial model quickly and in time to share with board members at their quarterly company meeting. Cashflow forecasting in particular has value for ClosedLoop, and using Jirav’s drivers, they can model the effects of changes for everything from staffing to revenue projections, building assumptions in any way they want, anywhere throughout the model.
In addition to the time savings ClosedLoop gets from ditching the Excel model, the company can now do things they couldn’t do before without a full-time CFO. “We didn’t have a pro forma forecast—we’d do it maybe once a year, and play with the assumptions,” said Eye. Without a CFO and before Jirav, it was too time-consuming to perform these forecasts, even though the information they could gain from them was crucial to decision-making in their company’s early stages.
Using Driver-Based Modeling to Plan Hiring
As your company grows, it’s important to know when it’s safe to hire someone and when to wait. Driver-based modeling can improve confidence in the hiring process. By showing when your growing sales will both generate demand for additional hires and when it will cover their salaries you can be sure of the right time to expand your staff.
Imagine a SaaS company, LinkBot, producing chatbots for companies to use on LinkedIn. They sell a standard bot that needs some customization and customers will be supported by customer service reps who can handle roughly 20 clients each.
In an effort to increase the rate of its revenue growth, the company aims to improve customer retention and expand its sales and marketing department. Once fully onboarded, each sales team member can generate roughly five new clients per month. However, the company needs 40 new clients to cover the growth in costs from each additional sales staff.
LinkBot’s management sees three main drivers available in order to analyze the scenarios and determine which one best helps achieve the targets:
- Improving customer retention by reducing churn
- Improving sales efficacy and/or adding additional sales staff
- Increasing the number of clients per customer service rep through more efficient processes
Driver-based scenario modeling can help a company determine the impact of adjusting those three inputs.
Choose the Best
Plan faster and more accurately with driver-based modeling software. With Jirav, you can project sales and revenue, forecast your cash flow and plan your workforce all in one tool. You’ll save time and improve efficiency by reducing your dependency on complicated spreadsheet models.
Jirav’s best in class solution allows you to combine data from multiple sources to assess where you’ve been and determine where you’re headed.
