Profit-driven budgeting

Build next year from real cost, not last year plus a percent.

Profit-driven budgeting builds the plan from an attributed cost model, so each driver, volume, mix, price and cost-to-serve, is set on purpose, instead of inflating last year numbers and inheriting all of last year hidden losses.

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Cost and Profitability Consulting · TDABC since 2010 · CostCtrl platform
Per driver
volume, mix, price and cost-to-serve each planned deliberately, not blended into one growth rate
Defensible
every budget line traces back to the cost model behind it
Owned
each driver sits with the team that controls it, so the budget has accountability built in
01The problem

Last-year-plus-X scales up every mistake you could not see.

A percentage uplift treats a loss-making customer and a star account exactly the same: it grows both. Build the budget from a cost model instead and the conversation changes. You plan which customers to grow, which to re-price, and which to step back from, and the margin target is the sum of deliberate choices rather than a hopeful round number.

Illustrative. This year base, adjusted by the drivers you actually control, volume, re-pricing, mix and cost-to-serve, bridging to a budget you can defend.
02How we build it

Start from attributed cost.

The budget inherits a cost-to-serve model, so it already knows what each customer and product really costs.

Set each driver deliberately.

Volume by segment, planned re-pricing, mix shift, cost-to-serve initiatives. Every assumption is explicit and owned.

Bridge to the target.

The drivers roll up into a margin you can walk a board through, line by line, instead of defending a single percentage.

Track variance to the driver.

When actuals diverge, the model says which driver and which dimension moved, so the next budget is sharper than the last.

03Where it connects

The budget is the deliberate target. Forecasting is the running projection of where you will land. Both sit on cost-to-serve, so variance is explainable down to the layer and the team.

See profitability forecasting →
04Frequently asked questions

Questions a CFO asks.

What is profit-driven budgeting?
Profit-driven budgeting builds the annual plan from an attributed cost model. Each driver, volume, mix, price and cost-to-serve, is set deliberately and rolls up to a margin you can defend, rather than growing last year totals by a flat percentage.
Why not just grow last year by a percentage?
Last-year-plus-X bakes in every hidden loss-maker and every mispriced customer, then scales them up. A budget built from real cost lets you plan the mix and the pricing on purpose, so growth does not quietly dilute margin.
How does it connect to forecasting?
The budget is the deliberate target; the forecast is the running projection of where you will actually land. Both come from the same attributed cost model, so variance is explainable down to the driver and the dimension.
References

Sources

Canonical works behind this method. Each opens in a new tab.

  1. Book
    Beyond Budgeting: How Managers Can Break Free from the Annual Performance TrapHope, J. & Fraser, R. (2003). Harvard Business School Press.
    Foundational critique of fixed annual budgets, proposing adaptive targets and rolling forecasts.
  2. Book
    Implementing Beyond Budgeting: Unlocking the Performance PotentialBogsnes, B. (2016). Wiley (2nd ed.).
    Practitioner guide to replacing budgets with dynamic targets and rolling forecasts.
  3. Paper
    Time-Driven Activity-Based CostingKaplan, R. S. & Anderson, S. R. (2004). Harvard Business Review 82(11).
    The founding article defining TDABC and its two-parameter model.
Start with the Profit Check

Plan a budget you can actually defend.

The Profit Check gives you a first read in 12 to 15 minutes.

Take the Profit Check See the cost method behind it

Workshops20-21 Oct · Online, ZoomReserve a seat

Miguel Guimarães

Reviewed by

Miguel Guimarães

Founding Partner, Cost and Profitability Consulting

More than 150 Time-Driven ABC engagements across 11 sectors since 2010, working within the Kaplan and Anderson framework.

About the author →

Published

Proof

A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.

Read the case study →

Who you would be talking to

Miguel Guimarães, Founding Partner

Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).

Call +351 910 313 731

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Most read
  1. 1Time Driven Activity Based Costing
  2. 2Cost-to-Serve Analysis
  3. 3The Whale Curve
  4. 4TDABC vs ABC
  5. 5Customer Profitability Analysis
  6. 6Make-or-Buy and Relevant Costs
  7. 7Cost-Volume-Profit (CVP) and Break-Even Analysis
  8. 8Methods & Frameworks: how we cost, defensibly
  9. 9How to calculate cost to serve, step by step
  10. 10Manufacturing Solutions