Your Complete Guide to Annual Planning (Part 4): Costing out the P&L

Our five part series on Annual Budgeting for Tech Startups

Welcome back to part 4 of our 5 parts series on Annual Planning.

If you’re late to the planning party, here’s a snapshot of our syllabus:

Part I: The Kickoff

• Who’s involved in annual planning?

• Bottoms up vs tops Down forecasting

• Guiding questions and guardrails

Your Complete Guide to Annual Planning (Part 1): The Kickoff

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!)

Your Complete Guide to Annual Planning (Part 2): Building Sales Capacity

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

Your Complete Guide to Annual Planning (Part 3): Marketing Budget

Part IV: Costing out the P&L (Today!)

• 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 (Next week)

• 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

This guide comes from thousands of hours on the job, designing annual plans for multi billion dollar tech companies. And it’s strongly influenced by the hundreds of hours spent with my entrepreneur friends who are building their very first budgets.

Today we’ll show you how to fully burden your P&L - a fancy way of saying “find a home for all the stuff you spend money on".

Follow the headcount cookie crumbs

If there’s a single thing you take away from today’s jam sesh, I just want to say one word to you. Are you listening? Plastics Headcount.

Cost build ups should start and end with headcount.

• Headcount as an input and a driver: Believe it or not, 75% of costs at tech companies tend to walk on two feet. 

  • That makes nailing your headcount forecast key to budgeting success - not only is payroll the majority of your costs; it’s also a driver for the majority of indirect costs (e.g., software licenses, office expenses, rent).

  • So it’s less about matching the dollars in the model to people, and more about using the people to come up with the dollars in the model.

    • You may have an idea of where you want your cash burn (or profitability) to shake out, but to validate that you have to build up from the bottom starting with employees.

• “Max” headcount figures as a backstop: From an OPEX perspective, the most crucial part of the annual planning process is coming up with “max headcount” figures by department, preferably phased by quarter.

  • Leaders should hire throughout the year to stay within the bounds of a “total team size”. This is where annual plans are made or broken. Full stop.

• Establishing a baseline: In terms of putting numbers on paper, pick a date (like end of November) and draw a hard line in the sand. This is your starting baseline to work off of. Any headcount hired the rest of this year will be caught in a final refresh. But this is your single source of truth for the starting line to build off of.

  • If you didn’t have a company last year, nice! This will actually be a lot easier. Just decide what you want to pay yourself and your cofounders, and that’s the baseline.

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A List of Possible Expense Types

If you’re looking for the most basic, yet comprehensive, list of expenses to include in your P&L, start with these: