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.
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.
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.
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 →Questions a CFO asks.
What is profit-driven budgeting?
Why not just grow last year by a percentage?
How does it connect to forecasting?
Sources
Canonical works behind this method. Each opens in a new tab.
- BookBeyond 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.
- BookImplementing Beyond Budgeting: Unlocking the Performance PotentialBogsnes, B. (2016). Wiley (2nd ed.).Practitioner guide to replacing budgets with dynamic targets and rolling forecasts.
- PaperTime-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.
Plan a budget you can actually defend.
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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. Presented the Damco cost-to-serve case at Managing for Profit (Amsterdam RAI, December 2009), on the same programme as Robert S. Kaplan.
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