Driver-based revenue and expense allocations

Description

blank in Corporate Performance Management (CPM) software refers to the process of distributing revenues and expenses across different business units based on pre-determined activity drivers. These drivers could be unit sales, headcounts, square footage, etc. This process enables more accurate and fair allocations, thereby providing a clear picture of profitability across various departments or business units.

Example Use Case

Scenario: A large retail corporation uses CPM software for its financial planning processes. The corporation operates several stores across the country. The overhead expenses need to be allocated across stores for budgeting and planning purposes. The allocation activity drivers are square footage of each store and total headcount.

Solution: The CPM software implements driver-based allocations. Overhead expenses are allocated based on the square footage and headcount for each store. This results in a fair distribution of costs, providing an accurate view of profitability for each store and aiding in more informed business decisions.

Considerations

There will be cases where the allocation drivers need to be edited manually - maybe for a specific month or other situation that arises. Make sure you're able to modify the formula or enter a value manually without downstream consequences to the model. This is usually possible by editing the specific cell in the model. However, some formulas are all or nothing. If this matters to you, investigate further.

Questions to Ask a Vendor

Functionality: How flexible is the selection of drivers? Are any of them pre-built?

Multiple Drivers: Can we use multiple drivers, with if statements, to further automate an allocation exercise?

Reporting Features: Does your software provide reports showing allocations distribution and cost centers' profitability based on these allocations?