You need precise data as a small business owner to make future plans, particularly when it comes to cash flow and revenue projections. To ensure that staffing levels, equipment requirements, and marketing budgets are satisfied, an SMB growth strategy need the most precise forecasting model available.
78% of the firms surveyed by Gartner [1] employ driver-based revenue forecasting. Additionally, according to the businesses questioned by Gartner, driver-based predictions are the most accurate of the three popular forecasting techniques—run-rate, risk-based, and forecasts based on drivers.
We'll discuss how to produce one for your small business in this article using Gartner's suggestions on creating a successful driver-based forecast.
What is predicting based on drivers?
By identifying the key value drivers for your small business, driver-based forecasting enables you to base your plan and budget on those drivers. Driver-based forecasting can be used by an SMB to identify potential growth, which is essential for the survival of your business.
Your planning budget revolves around bringing in new business, and it can predict prospective growth using a number of different variables. Consider, for instance, a company that uses multi-axis CNC milling machines to produce small batches of high-quality parts for businesses that require precision parts. Based on client input, this manufacturing company may employ manufacturing-specific ERP software to collect data points about material shortages, supply chain problems, or product quality issues. Manufacturing companies may more precisely predict revenue and productivity for the upcoming year and beyond using these data elements, among others.
How to create a forecasting model based on drivers
How to link driver-based forecasting to business objectives is explained in this five-step method.
Step 1: Establish your company's objectives and critical metrics
Business objectives are typically straightforward statements that are qualitative in character. Consider the scenario in which you aim to rise to the top marketing firm in your city in three years. Your revenue growth is required to accomplish that, as it is the primary quantitative metric for that objective. As a result, you need the personnel and technological resources to use revenue management software to track and control growth.
Step 2: Determine which factors affect performance
How does your business determine success? Is it because of how many people you've helped? How many lives were saved? How many items were sold? Added visitors to the building? Based on your business strategy, decide which drivers will help you track your company's progress toward your goal and evaluate its effectiveness. Given that each customer spends $50 on average at your store, you may wish to attract 30 more customers each week to outpace your rivals in sales.
Drivers ought to be simple to use and have little potential for degradation. What does your business excel at? Does your company have a loyal social media audience that interacts with your posts? Can you continually improve your production process to reduce costs without compromising quality? Utilize your advantages to advance.
Step 3: Determine the factors that affect drivers
Two variable categories to be aware of while influencing drivers are static and dynamic. Static variables don't typically vary from one year to the next, so you can base your assumptions on them. For instance, you may identify the busiest times of the year for your clothes store because it thrives on seasonal and holiday buying. You might also believe that by carrying a fresh range of in-demand clothing items, the hype surrounding new trends will boost your business.
Dynamic variables, also referred to as indicators or leading indicators, can be used to predict the future performance of your firm based on past performance. However, as weeks and months go by, you continue to increase the output, which causes these variables to vary with time. For instance, your company expands steadily as a result of the steady growth of your base of devoted clients over several months. Every month, you bring on five additional loyal clients that help you increase your revenue.
Step 4: Decide who measures drivers and how to do it
To predict how they will aid in the growth of your company, you must measure business drivers. For instance, imagine that you are a factory who produces stem bolts on demand for significant equipment producers. Your company wants to enter the South American market, so you hire three bilingual sales representatives who are well knowledgeable about your product lines to boost your sales presence there.
To track prospects, sales, and revenue to determine whether your sales force is succeeding in your target market, you'll need a powerful customer relationship management (CRM) platform. Decide who will be in charge of managing this sales team for the ensuing year—possibly a sales director.
A plant manager, a line leader, the finance team, and you as the owner should all have access to the sales tool as you implement it so they can make judgements.
Think about a different motivator: You might wish to enhance the nutritional value and sustainability of the ingredients in your food items. Your procurement team must identify the proper vendors in order to locate the proper ingredients in order to accomplish that. In this sense, vendor management software can assist in automating procedures and providing your procurement specialists with the resources they need to make future strategic choices.
Step 5: Review and upgrade your model based on drivers
Driver-based forecasting is only as good as the individuals using it to make decisions. Always review your plan and adjust it as necessary. To increase recurring revenue by $1 million annually, for instance, you would have predicted that employing five new sales representatives would result in at least 20 more contracts over the course of a year. Find out what went wrong and make adjustments if your business only received 10 additional contracts during that time.
Keys to success for driver-based forecasting include common hazards
You can succeed with driver-based forecasting, but your team might need to overcome several typical difficulties with this technique.
You might believe that applying a one-size-fits-all strategy to your entire business could be effective, but selective forecasting—where you carefully consider a subset of historical data before making educated assumptions that can foretell future trends—might be more appropriate when discussing who generates sales and revenue versus how your business is run. Instead of using all or only some historical data, driver-based forecasting concentrates on the most important business factors.
Another problem is become overly reliant on your driver-based approach. You must be quick to adapt and flexible enough to make modifications if something doesn't work.
Avoid using forecasting models that are too specific. Based on historical data, materiality, and measurability, keep the projection to just one or two important criteria at the most. You can find insights from procedures and paperwork across your entire firm if you require additional in-depth information. For instance, revenue is one important statistic. Internal processes are how you increase revenue, such finding upselling chances with current clients through sales people and account managers who learn from current clients through contractual work.
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