Your Definitive Guide to Annual Planning: Where Do I Start?

👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.

Here’s what we’ll cover this month:

This series will come with planning templates you can use to build your own budget.

So grab your Zyn and let’s begin.

A GOOD operating model starts in month one and ends in month twelve.

A GREAT operating model never really ends - it just flows from the close of one period to the next, regardless of quarter or year ends.

Ideally you start this season working off the latest and greatest forecast you’re currently using to make decisions, and this exercise is a more granular reforecast on the next 15 months (you’ll see why I say 15 and not 12 in a second).

But if it’s a complete overhaul, we’ve got you covered as well (I’ve been in your shoes).

This should be an export from your HRIS system (Workday, Hibob, Bamboo HR etc.). It should include every full time employee and contractor, with their department, base salary, and any bonus they are eligible for. Note: If you’re doing your planning in an FP&A tool like a Planful or Aleph, you’ll be able to pipe this in via API.

This list should be segmented into two buckets:

For all you FP&A folks, this is where you get to do some gambling.

You’ll need to make a call as to the probability of each position being filled before year end. And if it does not, you decide if it deserves an initial placeholder in the baseline for next year (e.g., it will still get filled at some point).

The first bucket will have a higher close percentage applied than the second, as the time to open and fill a role likely pull you into the next year.

This piece of advice is critical: Where I’ve seen budgets fall off the rails is when open headcount get “trapped” in no man’s land.

They either:

The net effect of both scenarios is you eventually create an additional headcount out of thin air that wasn’t contemplated.

We’ll discuss this more in Part III of our series, but that’s why budget envelopes for the following year need to be presented as a “theoretical max to not exceed” instead of a “number of additional heads”, to capture anyone who gets caught in the middle.

This is the final month I include in my baseline. This means I’m really turning the screws on months 10, 11, and 12 of the current year and 1 through 12 of the next (or 15 total months for those keeping score at home).

You have to draw a line in the sand sooner or later. And if your board is functioning right, you need to get the plan approved around Thanksgiving during the Q3 meeting.

What does that mean?

You don’t have conclusive numbers on the year yet. That’s right - we’re working on next year’s budget before this year is solidified. And it could change if your year end is heavily backend loaded (I’ve worked at places where 35% of our new biz was in Q4, of which 20% was in December, and of which 10% was in the last week of the year).

Many companies circumvent this problem by just waiting to formally approve their budgets in late February or early March during their Q4 board meetings.

I think that’s WRONG. Here’s why.

The worst thing you can do to any company in hypergrowth mode is delay decision making. Your leaders are highly paid people who want to allocate resources to hit the new year’s targets. You NEED to get out of the gates fast.

Finance becomes a blocker when it sits on the budget envelopes until year end results are in.

Are you really going to delay allowing your sales team to hire new resources that need to ramp? Are you seriously going to hold off on committing to critical customer facing events later in the year? Are you actually going to tell your R&D team to delay planning for the hires needed to execute on the new product roadmap?

Whatever you gain in accuracy by waiting to get your board plan approved once the year is over, you lose multiples over in momentum.

Plus, every plan is technically wrong. It’s just a matter of how wrong (up or down) it is. And the style points for getting your plan 3% more accurate are outweighed by the benefits you get from having a clear and understandable comp plan in the hands of a sales rep on Jan 1.

Now, there will undoubtably be some sort of gap between where you finish the year and where you thought you’d be.

So what happens when there’s a gap?

You’re responsible for the plug. And that can be good or bad.

My take is you are still beholden to hitting the total annual targets you set. Whether you start the year with house money in your pocket, or clawing out of a (hopefully) minor pot hole, depends on how you finish the year.

But remember - you will build over assignment into your plan. And part of that cushion is to safeguard against this exact scenario, where you start the year in a bit of a different spot than you thought you would.

So the Total ARR and Total Customer Targets are what they are. And the Net New ARR and Customer adds adjust accordingly.

Worth restating: This means you are essentially doing a 15 month planning exercise, as you have to reforecast October, November, and December, as well as the full 12 months of the next fiscal year within your longer term operating plan.

The sales rep is the atomic unit for any budgeting process. You want to know how much you need to pay them and how much they can produce. The comp portion should be captured in your headcount roster. The attainment piece will need to come from your CRM.

To establish a proper baseline, revisit what you thought the targets for account executives were last year, see how close individual reps came as well as the median team members. Then have a discussion internally if you think they’ll be going up or down. Some hypothetical figures:

Things that will impact your decision making may include territory splits and new product launches. As you cut down on a rep’s territory, you need to give them more to sell to a smaller subset of accounts. Otherwise they’re getting the short end of the stick.

You want to get a full trailing 12 months to get the full picture, not just the nine year-to-date months. That means LTM from September.

I like to look at costs by category at the following levels:

I don’t budget for attrition. Any gap between people coming and going is a tailwind (buffer) to the budget. Plus, you can’t predict this, unless you’re the one exiting people. So your historical attrition rate is nice to know, but I don’t put money behind it or use it as an assumption. Let this be a gift later in the year to your OPEX.

Next week we’ll work on setting targets. And I’ll teach you the difference between a tops down and bottoms up budget. Stay tuned for some spicy templates.