What is driver-based forecasting?
Building projections from the underlying volume and rate assumptions. The total is the product of those inputs, not a number picked first.
Definition
Driver-based forecasting builds a projected line from the volume and the rate that sit underneath it. You multiply how many times something happens by what each time is worth, instead of picking the total first.
On the books, it is a planning method, not an account. Actuals still post to the general ledger; the volume and rate live in the planning file.
The drivers are the inputs. The projected total is just the product of those inputs.
Where it shows up
P&L: Related to projecting income and expense from volume and rate assumptions.
Balance sheet: Related to projecting assets and liabilities from the same drivers when those are modeled.
Cash flow: Related to projecting cash from the same drivers.
See also: Forecast · Budget · Scenario Planning
When you look at your Income Statement, this method is how a revenue or expense total was built. The statement still shows the total; the volume and rate sit behind it.
The Balance Sheet can use the same idea when units, days outstanding, or headcount drive a balance. Cash follows if receipts and payments are built from those same inputs.
Owners usually keep the drivers in a spreadsheet with a volume column and a rate column. The live books stay the record of what already posted.
A wash count times a ticket is easier to discuss than a lone $16,000 cell. You can see which input moved.
How it works
Name the volume and the rate for the line. Then multiply them to get the projected amount.
The build has two named inputs:
- Volume: the count (cars, jobs, hours, or seats)
- Rate: the dollars per count (average ticket, bill rate, or cost per unit)
Volume is the count: cars, jobs, hours, or seats. Rate is the dollars per count: average ticket, bill rate, or cost per unit.
Volume times rate is the build. Modeling several whole futures, or writing a single total with no inputs, is a different job.
Operating expenses can use the same shape. Supplies might be jobs times cost per job; payroll might be hours times a wage.
When actuals land, you can see which input missed. Fewer cars is a volume miss; a cheaper ticket is a rate miss.
Nothing posts when you change a driver. The general ledger still records the real wash, the real job, or the real hour.
If volume or rate is missing, the total is a guess. The method only works when both pieces are named.
Example
A car wash is projecting next month's wash revenue. The owner does not start with a round $16,000.
The shop expects 800 cars and a $20 average ticket. 800 times $20 is $16,000 of wash revenue.
If the lot is busier, 900 cars at the same $20 ticket is $18,000. If the ticket falls to $18 on the original 800 cars, the line is $14,400.
The books still post each wash as it happens. The 800 and the $20 are the build behind the heading, not a journal entry.
Soap and labor can follow the same cars. The volume is shared; the rate is the cost per car for that line.
The Financial Statement Package will show the actual wash total when the month closes. The drivers stay in the planning file so the next month can be built the same way.
Common mix-ups
Driver-based forecasting is not the same as writing a single total and calling it done. The method is the volume and the rate; the total is only their product.
Driver-based forecasting is not the same as modeling several whole futures. Three versions of next year is a different exercise than one volume times one rate.
Driver-based forecasting is not the same as the locked annual plan. The plan may use this build, but the method is how the number is constructed, not the approval of it.
Related terms
- Forecast: An updated projection of where the numbers are actually heading.
- Budget: The approved plan of revenue and spending for a coming period.
- Scenario Planning: Modeling several plausible futures to see how the numbers hold up.
- Sensitivity Analysis: Testing how much the outcome changes when one assumption moves.
- Annual Operating Plan: The full-year plan tying revenue targets, spending, and headcount together.
- Headcount Plan: The staffing plan behind budgeted payroll cost by period.
- Rolling Forecast: A forecast that always extends the same number of periods ahead as time passes.
- Variable Costs: Costs that rise and fall directly with sales volume.