Understanding what makes your business tick is the first step to growing revenue with greater focus. Key driver analysis looks at what impacts business performance to help leaders decide if they should double down or pull back on investments that divert important resources from revenue-building activities.
Paro fractional CFO Colin M. explains how he works with businesses to define their key drivers and build revenue more efficiently, especially in times of stagnated growth.
What are key drivers?
“[Key drivers are] those data points—the things in real life—that drive your business forward, that help you generate revenue in the sales channels that you’re in,” says Colin.
In addition to growth drivers, businesses can also conduct key driver analysis on their cost drivers and their cash flow drivers to further understand the most important factors that impact their business.
Key drivers can—and should—vary from company to company, because it’s all about understanding what makes your business work. However, businesses can also benchmark key drivers against industry competitors to understand how to drive growth just as efficiently as other market players.
Are they just another term for KPIs?
No, though they are related. The relationship between drivers and key performance indicators (KPIs) is a symbiotic one. Where your KPIs are a measurable objective, such as increasing margins by 10%, your key business drivers are what impact your margins or profitability. If your key drivers for profitability are inventory management or average transaction value (ATV), they can be focal points for meeting your KPI.
How do you identify your key business drivers?
Identifying key business drivers requires a combination of financial data and leadership discussions. Colin starts his key driver analysis by reviewing existing reports and financial statements, such as a P&L (profit and loss) statement, and having conversations with key leaders in the organization. These conversations establish what currently matters to the people in the business in order to gain specific insights into their various objectives.
Key driver analysis leads to important guardrails
Once you’ve identified your key drivers, you can better analyze what is worth investing in and where you may be wasting valuable resources. Colin notes that trying to understand expense drivers around payroll and marketing, as well as fixed costs, can narrow in on where your budget might be bloated.
During periods of high growth, “[businesses can] start to spend a little more loosely to chase some top line,” says Colin, and that’s pretty normal. But when that growth starts to slow or stagnate, knowing your key drivers can help you quickly pivot and get that spending under control.
Ultimately, a key driver analysis brings important inputs in your financial models and forecasts, which will help you identify risks and protect your business value. If you can predict risks before they happen and use your key business drivers to create “guard rails,” you’ll be in a better position to succeed.
Your key drivers will likely change over time
Should you be reevaluating your key drivers over time? Yes. But more specifically, you should be reevaluating key business drivers when you start to observe changes—both internally as a business and externally in the industry. Colin suggests reanalyzing business drivers “when the thinking around the business changes or when profitability starts to stagnate or sales start to stagnate.”
Disruption and economic shifts are bound to occur. Change is constant, and being flexible with your key drivers can keep you competitive when those changes impact the business. While it’s important to focus on your strengths, Colin suggests moving forward with eyes wide open:
“Think critically about what else is possible, whether that’s expansion into a new sales channel or getting deeper into a vertical within a sales channel to save some costs.”
For direct to consumer businesses, in which ad spend is becoming increasingly expensive, finding other ways to move product through an omni-channel model is crucial to driving growth.
In the other direction, brick and mortar companies have had to acknowledge that the driver of their local customer being the sole source of revenue was no longer in alignment with how customers were purchasing. “If you’re a brick and mortar learning the direct to consumer business, [then] understanding what drives that business and how to spread your net a little bit wider is critical,” says Colin.
Key strengths may lose importance over time, and unimportant factors can suddenly become critical to the business. So there’s even more reason to make the reassessment and reevaluation of your business drivers a regular part of your organization’s process.
Grow your revenue with the right focal points
Whether you’re proving your model or expanding into new markets, key driver analysis is a vital step in choosing the right levers for growth. Paro’s elite community of finance experts offer flexible strategic solutions to help your business drive revenue in any market. Get guided insights from experienced financial leadership to help you better understand your business.