A Three-Part Framework for Annual Financial Planning

As year-end approaches, most CFOs are in the throes of annual planning. To establish next year’s budget, financial targets, and growth projections, CFOs must gather input from various sources, establish leadership alignment, and present a plan that the CEO and board of directors will approve. The process can be grueling and requires the CFO to wear many hats, from a business partner and financial steward to”air traffic controller” managing a very complex cross-functional process. And, in times of volatility and austerity, CFOs often must be more meticulous in their approach to preserving and managing cash, including striking an ever-challenging balance between growth and profitability.

In this gauntlet of planning, a CFO’s best friend is a well-crafted strategy and process framework. To learn some of the secrets of effective annual planning, we convened The Circle for a conversation led by two former CFOs turned board members with ample experience in both sides of the boardroom table – Sandra Smith (former CFO of Segment) and Rob Krolik (former CFO of Yelp). 

While the complete planning playbook, calendar template, and mock board agenda Sandy and Rob presented were distributed exclusively to Circle members (apply to join here), here are the high-level takeaways and their three-part planning framework:

#1 Establishing a Strategy & Top-Down POV

Annual planning is the opportune time for CFOs to step back and establish a clear top-down point of view of the business and forward-looking projections. It’s imperative that CFOs begin the planning process with an opinion on what the next year will look like:

“The CFO is the repository of all the information at the company, both financial and non-financial. You have a unique purview and should be able to use it to form an opinion of what the next year looks like.” – Rob Krolik, former CFO of Yelp

Later-stage companies may require the CFO to adjust existing multi-year plans based on the current macroeconomic environment. However, CFOs of earlier-stage companies that do not have a multi-year plan will need to try and gather as many strategic inputs across the organization to help shape their point of view.

One effective way for CFOs to gather intel is to do a quick survey of other leaders on what they believe the top priorities and initiatives are for the company going into the next year. After identifying the key similarities and differences in opinion, CFOs can send out a follow-up survey to narrow that priority list even further. A deeper dive into the executive team’s various perspectives will come during the actual planning phase, but this exercise can provide a quick calibration for the CFO for companies still developing their strategic planning framework.  CFOs should reach out to their VCs, board members, and investment banking partners to get more color on the market and how other companies are responding to it.

Another key part of this initial planning and discovery is identifying the top five financial and non-financial metrics that matter most to the company. Financial metrics might include ARR, EBITDA, CAC/LTV, and Rule of 40, while non-financial metrics could be new product launch dates, NPS score improvements, or new region expansion. It’s an essential exercise that will help CFOs stack rank the top priorities for the business, recognizing that you won’t be able to “do it all”:

“Planning is all about trade-offs. Your plan won’t meet all of the company’s goals, but if you can get down on paper the top metrics for measuring financial performance and fundamental business progress, that will help focus your resource allocation strategy.” – Sandy Smith, former CFO of Segment

The desired outcome of this discovery is to develop what Rob calls a “palatable financial architecture.” This architecture is the company’s forward-looking projection for top- and bottom-line growth for the next year, folding in everything from headcount costs to sales and marketing and product development as a percentage of revenue. A 70-90% confidence level in this model is ideal (the higher the better but ok to come up with two models: one at 70% and one at 90%); however, in times of unprecedented volatility, CFOs may need to show the CEO and board a broader range of outcomes, caveating the macro-level factors that are outside the scope of the plan.

Sandy added that if your projection does fall on the lower side of the confidence scale when it comes time to present to the board, it’s vital to show leadership alignment on proposed solutions to close the gap.

#2 Optimizing the Planning Process

Upon developing a top-down point of view, CFOs will spend most of their time leading the planning process. In a “normal” year, this might begin with an executive offsite to establish strategy alignment, after which each leader will go back to their functional areas to create a budget proposal and annual goals. The CFO will be responsible for working with each leader to refine those plans before the final consolidated version is sent to the board for approval. 

Sandy and Rob offered several best practices for optimizing this planning process:

1. Start early! – Kicking off the process sooner means it’s less likely that the organization will be artificially crunched by an unnecessarily tight timeline. 
2. Work Backwards From the Final BOD Meeting – Having an end-date allows the CFO to create a calendar with milestones and check-ins for each functional leader to adhere to, with plenty of time for internal plan review.
3. Align Early With the CEO – Capturing insight from the CEO at the beginning of the planning process helps ensure alignment on the desired outcomes. It also helps establish how involved the CEO wants to be throughout the planning process, what initiatives or metrics they care most about, and how frequently they want status updates.
4. Identify Top Business Priorities With Leadership – While the CFO has their top-down view, it’s important to socialize that and establish alignment with other leaders early in the planning process. The goal should be to develop a baseline for budget and burn rate that each leader can keep in mind as they create their budget plans. “Having that baseline creates an agreed-upon financial architecture that you can refer back to throughout the planning process,” said Rob. He added that giving that initial strategy session and planning process a memorable “code name” can help it stick in the minds of each leader and give a common reference point for the conversation’s substance.
5. Create an Easily-Editable Budget Template – The CFO’s budget template should be formatted to gather input from other leaders quickly and match the shell of the final board presentation.
6. Set Checkpoints for Reviewing Department Funding – CFOs might receive pushback or requests for additional funding from department heads, especially as they begin diving deeper into their planning. This is why scheduling frequent check-ins with the entire leadership team throughout the planning process is important, including an interlock on go-to-market and product plan alignment when the plan is roughly 50% complete. “You will know where your sensitivities are going to be with different leaders, but it is absolutely a constant negotiation and balancing trade-off,” said Sandy.
7. Facilitate a Dialogue Between Leaders When There’s Conflict – CFOs often have to be mediators when there is misalignment between various leaders in the planning process. Establishing and encouraging that dialogue between leaders is critical, as is ensuring those conversations remain productive and within the boundaries of the agreed-upon financial strategy. One way to do this effectively is to invest time and energy into your CXO peer relationships so that you have rapport with everyone involved.

When CFOs are planning for or amid economic volatility, there are a few additional things they will want to keep in mind:

1. Cash is King – as profitability falls under more scrutiny, burn rate should be front-and-center in the CFO’s budget and target scenarios. Additional investment outside the baseline budget should be focused on initiatives that drive measurable top-line growth; if it’s unclear whether the ROI of an initiative will be achievable or visible, it may not be worth pursuing.
2. Build in Some Adaptability – “In any given year, the CFO will need to adapt either upwards or downwards from the initial plan; but when there’s more uncertainty, you may need to be that much quicker at adapting,” said Sandy. Establishing a threshold for gating or ungating additional funds throughout the year can help provide that additional layer of flexibility.
3. Socialize Scenarios/Action Plans With Leadership –  CFOs should work closely with each department head to establish KPIs that signal when it may be time to increase or decrease the budget throughout the year. For instance, the CFO and Heads of Marketing and Sales might do a deep dive into funnel metrics to create time-based milestones for when increasing headcount might make sense. It doesn’t necessarily need to be a rigid ROI template, but it’s important to give leaders a methodology for deciding when to invest more into their side of the business.

#3 Effective Communication With the Board

CFOs often are given the daunting task of presenting the final plan to the board and addressing any scrutiny or pushback. Rob recommends keeping the final board plan high-level, with a meaty appendix for those board members that want to see the finer details of the plan. “Many times, I’ll meet with those board members ahead of time to walk them through what we did to get to the final plan,” said Rob.

When rehearsing for the meeting, CFOs should anticipate big-picture questions from board members and always be prepared to share a well-formed opinion. During the meeting, if there’s a question that the CFO does not have an immediate answer to, it’s essential to not make it up on the fly – jot down the inquiry and follow up via email. “And if anyone on the management team says something that you know is factually incorrect – it’s hard to do this – but be sure to correct them,” said Rob.

The Takeaway:

Annual planning can be challenging, and the sooner the CFO starts, the better. Following this three-step framework can help CFOs manage the process and desired outcomes more effectively, keeping in mind that planning can and should change alongside market conditions and the company’s growth.

Apply to join The Circle and become part of conversations like this with other CXOs regularly.