Glossary
driver-based forecasting
Also called driver-based modelling, bottom-up forecasting, driver-based planning
Driver-based forecasting builds a financial forecast from the operational inputs that produce the numbers, such as prices, volumes, headcount and costs, and derives the financial statements from them.
A driver is something a business decides or controls. What you sell and at what price. How many units you expect to shift. Who you employ and from when. What you spend on rent, software and marketing. What you have borrowed and on what terms.
The contrast: historical extrapolation#
The alternative, sometimes called top-down or historical forecasting, takes what the accounts have already recorded and projects it forward, typically with a growth rate applied. It is faster and it works well while the future resembles the past.
It has two limits. A business with no trading history has nothing to extrapolate from. And a business planning a change is asking exactly the question a projection of its own history cannot answer, because the change has never appeared in the data.
What it costs#
More work up front. You have to describe the business before anything comes out, where a ledger-connected projection appears the moment you authorise the connection. The return on that work is a model you can interrogate and change, and a forecast that exists for a business with no accounts at all.
Who uses it#
It is the standard approach in corporate financial planning and analysis, and in startup fundraising, where the model has to describe a business that does not exist yet. It is less common in small business software, where connecting an accounting system has historically been the easier product to build.