Your Complete Guide to Annual Planning (Part 5): Bringing it all together
Our five part series on Annual Budgeting for Tech Startups
If there’s one thing I know, it's that both your budget and my budget will both be “wrong” at the end of 2024.
I’m sorry, I know you don’t want to hear that after four banger posts on this planning thing we do. But demz the facts.
It’s really a matter of who’s “less wrong”.
I always tell my teams that budgeting for anything that’s in hyper growth mode is really, really hard. I mean, try to predict anything in your life that’s literally doubling each year - it’s like a bad carnival trick where they spin you around, blind fold you, and ask you to throw a dart at a board that’s also moving.
And planning for 2024 will be even more difficult. Although we might be taking a bit of heat off our fastball when it comes to top line growth next year, you’ve got a lot more to pay attention to. Much like you can’t build a house with expensive windows and no roof, you can’t present an operating plan to your board that isn’t solid at both the top and bottom of the P&L.
A quick recap of what we covered in the four prior lessons, and then five parting tips.
(And if you want to hear more verbally, I’m lucky enough to speak with the fine FP&A folks at Abacum today during their “CFO Days” about this crazy budgeting game we play.)
Part I: The Kickoff
Who’s involved in annual planning?
Bottoms up vs tops Down forecasting
Guiding questions and guardrails
Part II: Building sales capacity
Modeling out rep ramp time
Pod ratios: Business Development Reps, System Engineers, and Sales Managers
Quota deployment and over assignment (shhhh!)
Part III: Designing a marketing budget
Modeling Pipeline Coverage and understanding the marketing funnel
Working with your CMO to develop a “GL pick list”
Programs vs People cost split
Part IV: Costing out the P&L
Modeling headcount as an input, and a driver
Forecasting non-people costs
Developing a mutually exclusive list of expense types
Part V: Bringing it all together (Today!)
Modeling P&L by cost type vs P&L by department
Checking your outputs: CAC Payback, ARR per head, cash runway
Five year plan tie in
OK, and to put a bow and ribbon on this series, here are five tips for planning your operating plan in an uncertain economic environment.
They aren’t for the faint of heart.
1. Take your bottoms up headcount build seriously
70% of costs at software companies walk on two feet. To hedge the bets you are taking in your operating plan, start by seriously analyzing headcount, as everything else will follow.
Don’t believe me?
Approximately two thirds of your software tooling is probably expensed on a per head, per license basis (until the usage based revolution comes and changes everything to consumption based… but that’s not next year)
After tooling, the next biggest expense is office space. These are long term commitments that you don’t want to lock in without knowing how many people will actually show up everyday (note: there is a direct correlation to both the quality of your snacks and the number of people who show up. I stopped showing up to the office when they replaced Welch’s fruit snacks with Costco brand fig newtons)
And travel should be forecasted by person, by activity and by staffing level (exec vs plebeians)
I bet that covers 90% of your expenses. And if I was a betting man, we’ve eliminated a lot of tail risk by getting headcount right.
So you should begin the process by doing a tops down percentage build of headcount by department (e.g., will Product evolve from 10% of total headcount to 12% next year?), then perform the actual bottoms up build with leaders, and finally sanity check that what dropped out fits within your top down budget envelope.
2. Spend extra time this year interlocking the engineering and product teams
Few people understand that your Product Roadmap is essentially synonymous with your 5 year Revenue roadmap. You can only sell what’s on the back of the truck.
That means you need to think through which engines you are incubating for growth outside of just this year. Although we are planning for the next 12 months, this should be the first puzzle piece in your 5 year planning model. The two are forever intertwined, like Peanut Butter and Jelly.
2024 is really the first chapter of the 2024 - 2029 plan.
3. Build a plan that gets your sales people PAID (and your CAC back)
Perhaps the biggest mistake I’ve seen companies make in a downturn is setting the sales goals too high. (I think I just heard a few jaws hit the floor.)