Drive(r) to survive

When I think of the word ‘reporting’ I hardly think about the financial statements.

Why is that?

Because in FP&A we live a level deeper.

We live in the DRIVERS of those financial statements.

And our reports are all about helping us see exactly what’s happening in the business and tying it back to the financial statements.

So we need to be well-versed in both so we can bridge the gap - which is exactly what FP&A’s unique role in a company is.

Today I’ll teach you how you can exploit that unique role of focusing on drivers so you can add more value.

Let’s jump in!

Finding your drivers

Obviously we need to start this off by talking about how to find drivers.

The problem is that every business is unique, so there’s no 1 perfect way to do this.

But I recommend you start with revenue drivers…

Why?

Because revenue is often the most critical driver to get right.

And before you jump to any external data sources, you should start your journey by looking inward at the business operations*.

In my book The FP&A OS (that you can pick up in the FP&A Academy) I give you my favorite way to identify and map your revenue drivers:

The key here is to work backwards from revenue and ask the question from a customer lens - what is the step right before collecting revenue? It’s them becoming a customer.

Then you ask the question - what is the step right before becoming a customer? It’s them showing up to a demo call and getting a proposal sent to them.

What’s the step right before that?.. (you get the point).

Then you can use a mixture of the input and output metrics to build into your reporting, analysis, and forecast (more on that later).

This doesn’t just apply to revenue either - you should look all over your financial statements and ask the question ‘what’s the business operation that drives this outcome’?

• Employee Salary = Number of Employees * Average Salary per Employee

• 401k Expense = Average Employee Salary * Average Contribution Rate

• Cost of Goods Sold = Average Margin per Product * Product Mix Sold

What should I do with my shiny new drivers?

Don’t just put your drivers in your forecast model and call it a day!

There’s so much potential for them that we need to highlight them and start crafting the financial storyline around them.

For example, when your revenue forecast comes in a bit lower than you forecasted, you can use your drivers to visually explain the root cause with something like a waterfall chart.

Something like this can even be automated so that every month you update your forecast picks for each driver, pull in actual results, then the waterfall chart automatically updates for you.

Send this bad boy out to your key stakeholders and watch them get all hot-and-bothered about that nasty conversion rate %.

Here’s what you’ll hear:

• Was it a bad forecast pick?

• I didn’t align to that!

• But what about our awesome kept appointment rate?!

• Can you help me understand what happened with our conversion rate?? (bingo!)

It’s outside of the scope of this lesson, but this is why it’s so critical that you work with your business partners to develop your driver-level forecast. You can’t be presenting a forecast back to them that they didn’t align to.

Drivers start with the forecast. This first step enables you to do deeper reporting and analysis.

Every month it’s your job to look for the biggest driver of a result that’s adverse in your financials and go deep into root cause analysis.

If you just did this one thing every month for the rest of your FP&A career, you’d be set.

The danger of drivers

This lesson wouldn’t be complete without a quick heads-up about how drivers can trick you.

One day you have a perfectly accurate forecast model (yeah right, but we can dream) and the next your forecast model is as useless as if you threw darts to make your picks…

What happened??

• A new product launched that has very different driver numbers than the average and you didn’t correctly include it in your model

• The market shifted which is driving different actuals and now you need to understand if that’s temporary or permanent

• A hyped-up launch of a new service didn’t quite hit like you expected in your model (based on business partner guidance) - now you need to understand how much of your forecast miss is driven by that or something else

It would be so much more simple if we could just forget drivers and only forecast the P&L and a bit of the BS/CFS.

But the missing context would leave you practically useless as an FP&A professional.

On the other hand, maintaining all these drivers can be a handful for even the most experienced FP&A professionals.

It can feel like playing a game of whack-o-mole with finding drivers that are breaking down, analyzing them, then fixing your assumptions.

But that’s the job in FP&A.

In summary:

In FP&A, drivers are your babies.

Take care of them - feed them - check on them…

Over time you’ll find that you’re operating at a level deeper than the rest of the business and you’ll become the go-to person who can understand both the financial side and the business.

Say hi 👋 on LinkedIn