The “Science” of Annual Planning

Annual planning is both an art and a science. In pursuit of a board-approved budget and a set of financial targets, a CFO has to lead the executive team through a gauntlet of group planning sessions, individual tasks, check-ins, and milestones. A well-crafted planning framework is table-stakes in this process, but leaders that have been through annual planning before also find that small strategic hacks can help optimize the process and drive better results.

At the start of every planning season, we convene The Circle community for a two-part discussion on improving their annual planning strategy. Part one of the discussion was led by two seasoned finance executives – Greg Henry (CFO of Couchbase) and Doug Ireland (former investment banker turned CFO) and focused on the science of annual planning, from establishing executive alignment to consolidating metrics, scenario planning, and reporting to the board. 

(A link to the takeaways from part two on the art of annual planning will be available shortly)

Aligning Leadership on Top Priorities

83% of companies we polled in The Circle use a combination of top-down and bottom-up annual planning. However, the initial top-down plan almost always comes from the executive team.

An executive offsite is a great way to kick off the planning process and align everyone on the top priorities and budgetary concerns going into next year. At the same time, this exercise can illuminate some key assumptions or unknowns that need to be addressed in the planning process.

Executive alignment can quickly devolve into siloed conversation or disagreement, but our experts shared a few tips for how CFOs can keep the process grounded and well-organized:

1. Start by reviewing the planning calendar. “A very robust planning calendar is an underappreciated asset,” remarked one CFO. CFOs have found a lot of utility in walking their teams through the planning experience before it begins, including highlighting key milestones and deliverables. Take an opportunity to survey the team on what worked or didn’t work well last year. Then, identify whether there are team members with less experience in annual planning that might need some additional support throughout the process. A lesson Greg learned through his annual planning experience is to flag any significant budgetary issues – like sales compensation – that might warrant additional planning cycles and create a separate agenda to address them. 
2. Set the budget constraints. While the goal of annual planning is to imagine what’s possible for the growth of the business, CFOs can benefit from establishing at least cursory budget constraints early in the process. This was a lesson Doug had learned, having found that it becomes more difficult to reign in departmental wishlists if initial budget constraints haven’t been set. For early-stage companies, he recommended sharing budget vs. actual reporting with department heads for some months before the offsite to help them differentiate between what’s in their budget now and align on who owns which vendors. 
3. Establish the tone of the planning cycle. Your initial top-down plan must reflect leadership alignment on next year’s key business priorities and assumptions. But the CFO often has to facilitate that conversation by providing context on the macroeconomic and financial conditions that might impact success. Furthermore, the CFO and the CEO have to decide how aspirational or realistic the final plan should be so that leaders can set stretch targets they can be held accountable for hitting. 

Scenario Planning and Evaluating Metrics

Following the offsite, each department leader will help gather inputs that validate or challenge the assumptions of the top-down plan. The culmination of this process is an interlock on go-to-market and product plan alignment, where the final plan is roughly 50% complete. In addition to 1:1s with individual leaders, two things happen concurrently during this process that the CFO needs to monitor.

First, there is the metrics gathering exercise. Each functional leader must gather and report on a set of metrics that help the CFO forecast expenses and run rate. Rather than sending your leaders on a data-finding expedition, our experts advised guiding leaders to focus on the top few metrics and variables that will have the most significant business impact.

“As CFOs, we can only focus on what we can control. Pick one or two metrics that the plan will stay fixed on. Then, make sure everyone on the executive team is clear on the biggest drivers impacting those metrics.” – Greg Henry, CFO of Couchbase

The second part of this exercise is scenario planning, an area where many CFOs struggle. As one CFO noted, there can be many variables or economic uncertainties that team leaders may not know how to account for when planning next year’s budget. Again, the trick here is to opt for simplicity, and keep each leader focused on very specific line items that they control in the final budget.

“Only put in front of your department leaders the discretionary spend they control, even on a cost-per-head basis if possible. Reducing the amount of data you expect them to produce can really focus them on getting those numbers right.” – Doug Ireland, former investment banker turned CFO

One tactic that can help smooth this part of the planning process is using easy-to-use templates or giving leaders the autonomy to present what they need. “Giving people a 40-page template to fill out isn’t very constructive,” said Greg. “Instead, let them present what they need to justify how they will achieve that top-line number.”

A few CFOs also highlighted the importance of ensuring every department head explicitly confirms their final budget numbers during this part of the planning process. This high-value extra step may require individual follow-ups or email confirmations from each department leader, but it ensures alignment across the organization. “Make sure there isn’t an opportunity for leaders to come back and say they didn’t understand the budget or their constraints,” said one CFO. 

Engaging With the Board

CFOs agreed that submitting a preliminary plan and meeting with individual members before the final board meeting is critical for soliciting feedback and fine-tuning the strategy.

“You want to show the board how the organization is performing in terms of productivity and growth,” said Greg. “If the growth rate isn’t where they expect it to be, you can run different scenarios explaining what would be required and how spending will need to change to get to that next level of growth or profitability. It just becomes a more healthy conversation.”

Avoid going too deep into the numbers when presenting to the board, added Doug. “When you’re a private company, sometimes the temptation is just to put the whole model in front of the board, and it just raises more questions than it’s worth.” To the extent you can share peer benchmarking data on growth and efficiency metrics, that can also provide valuable context to the board. 

The Takeaway:

While annual planning is a complex undertaking, it is also a significant opportunity to obtain board and executive alignment on the major priorities and challenges for the business. A methodical approach is a necessary foundation, as is coming prepared with some tactics for influencing, collaborating, and resolving conflicts with others (discover those in part 2 of this series – coming soon)

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