The last couple of years have brought many changes for almost all the industries and all the organizations. Some of these significant changes include the management and the budget-making process. Due to the uncertainty lying ahead of us, we need to think about the tools and the methods used to forecast future sales and expenses and revise them.
In 2021, CFO’s and the senior management will have to look at scenarios from a different angle and realize what practices they have been keeping and the downsides to it and what can be done to improve those practices to achieve better results. Everyone will need to be on the same page for the project to be successful. Things are changing, and the new normal will have to be something that companies and all the employees and senior management agree upon. It doesn’t mean changing the organization’s culture; it just means that it’s time to review and update the practices.
The finance department is the core department of any organization, and it’s they who will have to decide which practices to adopt and how to take their organization towards a better future. So, the point is that changes will need to be made to move forward efficiently. One of these changes is shifting towards a driver-based budgeting and forecasting approach.
Only a few companies implement driver-based budgeting or forecasting. The reason is that the traditional budgeting and forecasting models are so difficult to abandon. So, the question is, what is the ultimate benefit of making such a radical change?
The traditional annual budgeting process is lengthy and tedious for most companies. During the summer, top-down guidance is developed and communicated, and bottom-up estimates are compiled and consolidated in the late fall. It is then decided on the final numbers, which are then rolled up to match them. For many companies, budgets for the following year are not locked down until January/February. Your annual notes include what went well, what did not, and how you can improve the process for the following year. A new excel model is created each year. Assumptions are documented better, and information consolidation is streamlined. But the incremental improvements don’t seem to affect either budget accuracy or budget completion time. If all this sounds tedious to you, then perhaps driver-based budgeting is proper for you. There is a good chance that you are closer to doing so than you think!
Moving Towards Driver-Based Budgeting
Driver-based budgeting allows you to move away from the written explanation and let your data tell the story more effectively than ever before. Your understanding of the relationships between various areas of your business and the elasticity or inelasticity of different drivers improves over time. Higher quality and faster decision-making process is the result. Everyone makes it seem like it’s an easy process. Execution is more complex than the concepts, which are simple enough to recall off the top of your head. Excel is no longer a viable option for complex organizations because the models are too complicated. Finding the “vital few” drivers and then determining how detailed to make them is always challenging. And it would be best if you remained flexible, modifying/removing/adding drivers as the business environment changes and as you gain a better understanding of what levers are most important to your business’s success.
Advantages and Challenges of Driver-Based Budgeting
When moving towards making this change, you should.
- Discard work that does not add value to the company’s bottom line. As a result of traditional budgeting, you may find yourself planning at a level that isn’t necessary. Ask questions like:
- Your finance department does departmental office supply planning?
- Will it matter if a department’s performance in this area is wildly off?
- How many other business categories are similar to this?
- No one ever uses the time spent developing and preparing details, why?
- In organizations, monthly financial and variance analysis can be completed quickly. Your actuals can be incorporated into your driver-based models once they’ve been developed. Ideally, these models should be based on your business’s “key drivers.” Structured around these drivers, the information is easier to understand and communicate.
- The why comes first, before the what. Using traditional budgeting, the budget is brought up to date with the actuals. Whoever is doing the analysis can then create whatever story they think will sell. Driver-based budgets provide a clearer picture of the truth. As table/chart-driven output, a driver-based budget scheme could include these details by product line regarding volume, sales, and price.
Why Automobile Industry Needs Driver-Based Approach
With colossal uncertainty rising in the overall business world and post covid scenarios of change, it is essential to consider some modifications based on reducing uncertainty or dealing with it to move forward. The automobile industry has a lot going on, and automobile manufacturers are making automobiles and parts. It is essential to properly budget the sales to produce similar or close to actual inventory amounts; otherwise, losses may arise. A shift to driver-based budgeting can help automobile manufacturers to cope up with these uncertain and changing times.
Mazda North American Operations
A Japanese multinational automaker, Mazda Motor Corporation, is located in Fuch, Aki District, Hiroshima Prefecture. 2015 saw Mazda produce 1.5 million cars worldwide, with the majority (nearly 1 million) coming from the company’s Japanese plants, with various other factories worldwide. Production-wise, Mazda ranked fifteenth in the world in 2015.
In North America, Mazda is an Irvine-based corporation famous for including financial operations in its routine, which has helped the company achieve a distinct position in the market. Mazda is believed to be one of the car manufacturers which focuses significantly on implementing the latest driver-based methodology for financial models to forecast and budget, which improve their performance every year.
Recently, this automaker has launched a budgeting and forecasting application that will project parts and categories sales of its dealerships across the country. This parts objectives application uses driver-based budgeting and forecasting to predict and control the revenue from the parts sales of Mazda dealerships across the USA, which includes five regions and 550 plus dealers. Using this application will help them forecast their parts sales better and then plan accordingly for the future and manage their expenses.
This application highlights that Mazda dealerships will now see their target revenue sales for the coming year from this application. As mentioned before, Mazda is a leader in implementing driver-based budgeting and forecasting methods as compared to the other automakers. Even in the past, they have used these budgeting and forecasting methods to gain a competitive advantage over their competition, and this new approach to include all the dealerships in the USA to implement driver-based budgeting and help them forecast their sales will only make the company more robust and better.
The Competitive Advantage of Driver-Based Approach for Mazda
As discussed above, using the driver-based budgeting approach has its benefits, and Mazda has adopted these. The advantage gained by Mazda can be seen from the increase in its sales. 2019 marked one of the most challenging years for the automobile industry, where uncertainty was high and low sales. Times like these added to the importance of the need for a shift to driver-based budgeting.
If we look at the statistics of 2020, we see that the change in sales as compared to 2019 of different automobile manufacturers in America are.
- Sales of Mazda increased by 3.4%.
- Sales of Hyundai increased by 0.6%.
- Sales of Kia decreased by 1.7%.
- Sales of Toyota decreased by 19%.
As we can see that Mazda outperformed its competitors in terms of vehicle sales during an uncertain time. This exceptional performance was attributed mainly to their efficient budgeting and forecasting process. Mazda used drivers to perform and revise its budgets, and it offered Mazda a competitive advantage to outperform its competitors. It is not easy to change budgets, but Mazda’s finance department easily remodeled its budget because of driver-based methodology.
During the pandemic time, Mazda offered free oil change and enhanced cleaning for healthcare workers directly relates to the capability to remodel the budget and forecast. Mazda uses the latest technology in finance to improve its efficiency, which sets a role model for other automakers.
With changes coming in all the aspects of our lives, we must think about going in advance to cope with future challenges. A new approach to budgeting is a must for all organizations, and a driver-based process is a suitable option. Mazda North American Operations have taken the lead to implement such a method and has taken the competition head-on.