Financial planning systems are geared to secure two main financial goals of a company: gaining profitability and securing financial stability. Forecasts are a crucial addition to any financial planning system to steer corporate performance, i.e., identify measures to secure the financial goals early on. While financial planning allocates appropriate resources to corporate operations, financial forecasting predicts how key performance indicators (KPIs) will develop as objectively as possible. Importantly, these forecasts are independent of plans, thus enabling management to make informed decisions and adapt actions to reach corporate goals.
The case of the multinational crystal jewelry designer Swarovski illustrates the challenges in the evolution of the planning process from traditional budgets to analytics-induced driver-based planning and forecasting for better decision making (see also Renita Wolf’s 2015 Strategic Finance article Broken Budgets?). These driver-based planning and forecasting systems, when distilled to their smallest unit, consist of a set of value drivers. Value drivers represent the key influencing factors of a business model. In a driver model, value drivers are mathematically combined as interdependent variables, meaning they systematically relate the performance-driving activities of companies to the financial and strategic performance measures they influence.
Driver models help analyze organizational developments as they combine cause-and-effect relationships and time effects. These cause-and-effect relationships can be visualized in a driver tree chart to further enhance the understanding and communication of a business model. By translating the business model into value drivers, driver models can be used to simulate different scenarios for planning and forecasting. This characteristic is particularly vital for companies operating within a VUCA (volatile, uncertain, complex, and ambiguous) environment. Driver models shed light on the effects of changes in individual value drivers on top KPIs (e.g., return on capital employed) and enhance the understanding of the business model with its specific steering levers.
Erschienen als: Weiser, M., Nudelmann, M., Möller, K., Farahi, P., Value Drivers for Financial Planning, in: Strategic Finance, 2023.
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