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5 Annual Planning Strategy Hacks for CFOs
How to maximize the impact of your financial planning process
Annual planning season is one of a few key times of the year when the CFO is square in the spotlight. No matter the company, business model, or sector, the process is rife with challenges as finance leaders collect shopping lists from various departments and inevitably have to play “budget police.” And after two years of drastic uncertainty, CFOs have learned the importance of careful yet flexible planning and how to set the right expectations with the board.
To dive into all of this and more, we convened the CFO|Circle for a workshop to help peers compare notes on planning processes, approaches, tips, tricks, roadblocks, and strategies. The conversation was guided by four experienced CFOs: Mirna Daouk of PayNearMe, Jen Loo of Tala, Matt Frey of Qumulo and Matt Guimbarda of Traxero North America.
Here were five key takeaways our members walked away with:
1. Get Your Board Members Involved Early
Once the CEO and CFO are aligned on the high-level business objectives, it’s vital to solicit input from the board of directors and ensure you manage their expectations. That’s particularly true this year, says Circle VIP Matt Frey (who is a board member himself) as VCs may have noticed quite a bit of variation in their overall portfolio performance and that may impact their expectations for your business.
“I think you have to really push your board and ask questions about what’s more important to them: managing burn right now or driving growth? Often you’ll find that within a certain range, they’ll tolerate incremental burn; but below a certain point, burn becomes everything to them. So if your performance drops to below a certain level, all of a sudden their focus shifts from how much you’re growing to how much you’re burning. And you really want to understand where your board sits on that line.” – Matt Frey, CFO of Qumulo
During breakout discussions, Circle Members shared a few different ways you can solicit this type of feedback. The most direct way is to put a preliminary plan in front of your board – either as a full group or in 1:1s – during the initial weeks of planning. This plan might include projections on headcount, existing resources, and P&L (and implications on burn) along with how much they plan to invest. This approach helps gauge the board’s temperature around new investment versus managing profitability and growth, and provides the flexibility to go back and envision multiple scenarios towards achieving those expectations.
Another Circle member shared a novel approach to soliciting board feedback through a direct survey. Their approach was to show the growth profile from the last three years and forecast for next year, and surveyed board members to fill in the blanks for the next three years on where they would want to see revenue, gross margin, operating loss, burn, cash burn, and headcount.
You’ll likely find a bit of variance in your board’s feedback, but that is a good thing. It can help you identify what each board member views as the biggest opportunity or risk based on what they’re seeing both at the company-level and in the market.
All of that input is not only informative during the planning process but it can also help reduce the risk of conflict with your board later down the road. You don’t want to be arguing with your board about engineering headcounts or planned investments for the year at the 11th hour. Getting their input early helps ensure there are no big surprises when it’s time to finalize the budget. As an added bonus, engaging in any of these ways with the board during annual planning is an excellent way to build deeper relationships with your board members as a CFO.
2. Align Your Internal Teams
The CFO has a tough role to play in the annual plan, from gathering the right information, to setting the plan and budget, to ensuring everyone in the organization understands and adheres to it. Collaboration is key, says CFO Jen Loo. She advocated having those harder conversations with your different stakeholders early so that you can identify the misalignments before the planning process begins, rather than creating more friction in the thick of it.
“So much of this process is about understanding the pain points and what’s driving each department. As CFO, your job is to identify the friction points within the organization that you know are going to come to a head if not addressed, to bring those discussions forward and to grapple with them head-on.” – Jen Loo, CFO of Tala
Another Circle Member added that financial transparency can help internal stakeholders visualize revenue growth and their individual contributions to it. They clearly communicate in detail where the company wants to be, what the board expects, and how team members can contribute.
3. Balance Growth and Spend
Capital efficiency is always top of mind for CFOs, but baking it into the annual financial planning process can be tricky. Especially now, as many CFOs find themselves either flush with excess capital or given a directive around hyper-growth from the board or CEO, CFOs have to carefully balance new growth investment while protecting the core business.
We heard a lot of different approaches to managing growth and spend throughout the organization, from top-down to bottoms-up and hybrid models. Almost all centered around separating out the realistic growth and financial scenario from the aspirational. In other words, a base plan (also called a 90% confidence plan) should allow a CFO to confidently map out the essential resources, investments, and headcount needed to maintain and scale business predictably. This projection then breaks down into trackable and measurable KPIs or OKRs for key internal stakeholders to factor into their annual plans and is often the plan ultimately presented to the board.
Former CFO and serial board member David Oppenheimer added that boards love to see your base plan but also the underlying factors and risks that might impact your ability to meet or beat that plan. At the same time, boards want to see your stretch goals and the growth investments you’re making in those areas. These types of discretionary investments are often where the uncertainty lies and often where the massive budget requests start to happen.
To engender greater confidence in these initiatives, Circle VIP Mirna Daouk believes it’s important to have your teams really investigate the business use case and potential ROI of their budget requests.
“Ultimately, you want a balanced portfolio of initiatives that have high certainty and lower certainty yet potentially higher rewards. Then you can allocate investments based on expected ROI.” – Mirna Daouk, CFO of PayNearMe
Similarly, Circle VIP Matt Guimbarda shared that his framework for vetting new projects and investment initiatives centers around an assessment of the total investment required, amount of risk or uncertainty, and expected return or reward.
“If you can think and somewhat accurately predict those three criteria, then you can start to say, ‘Well, if this is low investment, high reward, and an acceptable level of risk, that should be higher up the list,’ and you can start moving things around and kind of stack, rank, and prioritize projects.” – Matt Guimbarda, CFO of Traxero North America
4. Bring More Leaders into the Strategic Planning Process
Beyond involving your CXO peers and department heads in the annual planning process, the CFO|Circle also agreed on the importance of involving leaders one step down on the organization chart, as they are likely to assume more senior roles in the coming year – especially at high growth startups. This will not only help prepare those individuals to take on more responsibility, but also provide CFO’s with a perspective they might not have factored into the big-picture planning.
Strategy offsites are a great medium for this kind of exercise. Many CFOs noted that they plan to conduct leadership offsites this year before formally kicking off the planning process, agreeing it can be the best way to align on targets, strategic priorities and investments. Just as importantly, it also helps build alignment on what not to focus on. There are obviously many different approaches to leadership offsites, ranging from structured agendas to more open-ended brainstorming and whiteboarding.
A couple of creative ideas came up for offsite pre-work, too. One CFO tasks each executive to write out a one-pager of all the things the company needs to achieve over the next 12 months. Then, in an exercise mimicking Amazon’s planning method, leaders are challenged to envision major outcomes and work backwards to piece together how they achieve them. In this case, the CFO and their team wrote a hypothetical press release two years into the future highlighting the company’s successes, and then collaboratively worked backward to map how they got to those milestones.
Performing these types of exercises enable executive teams to come into the offsite with clear intended outcomes and leave the offsite with better alignment on the business objectives and ideas on how to translate those goals into their respective OKRs and budgets.
5. Establish Benchmarks Collectively
Another valuable data set to have when you walk into your annual planning meetings is peer or competitor benchmarks for growth performance. In particular, you may want to see how similar companies are performing around annualized revenue rate (ARR) and cash burn rate. You might also want to look at revenue growth rates two, three, or even four years out for companies on a similar growth trajectory or within your business category. Our VIP Matt Frey approached building this competitor list collectively with their leadership team at Qumulo to gain even greater alignment on the metrics that mattered and, more importantly, the “why” behind them.
There are public benchmarking reports (like this one from Bessemer) but Frey also encouraged later-stage companies to reach out to their investment bankers to perform some of this diligence. “I routinely have at least two banks per year come in and talk to the board,” he commented, adding that in addition to metrics he also asks them to provide overall market sentiment analysis on growth (i.e. are investors leaning towards efficient growth or growth at all costs). The other benefit of bringing in bankers or advisors to talk to the leadership team? “Rather than me telling the team why certain metrics matter more than others, we hear the input together directly from the source and can build partnership around those insights,” said Frey.
As you head into annual planning season, consider applying to join The Circle and scaling your network with access to insights, support and ideas from your peers at top-performing growth stage companies.