Your Definitive Guide to Annual Planning - Part 3: Bottoms Up Budgeting

Helping you build your annual budget

WOW! Planning is in hot demand these days. I’m floored by the interest in budgeting resources. I even had to hire this punk ass kid to deliver some paper copies.

His name is Dylan. Dylan has no idea what FP&A is. Dylan keeps asking for a raise. Get back to work, Dylan.

Don’t worry, you can still get on board and receive access to all the materials.

A quick recap:

• Part I: Baselines Required to Start (HERE)

• Part II: Tops Down Target Setting (LAST WEEK)

• Part III: Bottoms Up Budgeting (THIS WEEK!)

• Part IV: How to Present your Annual Budget to your Board for Approval (NEXT WEEK)

Bottoms Up Budgeting

Finance works with each department leader to create a budget envelope, comprised of direct and indirect costs.

• Direct costs are related to labor:

  • W2 Employees

    • Cost per Employee = Salary + On Target Variable Pay + Benefits based on location

  • Contractors

    • More on this nebulous category later in the post. There are many flavors, and some are essentially full time employees in contractor’s clothing

• Indirect costs are all the other stuff employees need to do their jobs

  • Software / Tooling

  • Travel

  • Learning and Development

  • Shared Corporate Overhead

    • Rent, IT, Office expenses, etc.

• During the Bottoms Up build process, leaders present a biz case for the:

  • New heads they need, phased by quarter, to achieve their priorities

  • New tools they need to be more productive

  • The flex capacity they’ll want to use for specialized work, via contractors or professional services

• In order to get the department leaders going, the FP&A team is responsible for arming each department leader with baseline costs from the past 12 months.

  • Most of you will (or at least should) be using September through September data to account for seasonality and larger annual purchases.

  • I give each leader an excel workbook (or access to their department’s rollup in an FP&A planning tool) plus a quick summary slide of their costs across Software, Contractors, and Headcount.

Paid readers get access to the full set of templates in a link below

• This should account for the majority of attributable costs, with the exception of Travel and Learning & Development.

• I find that laying out EXISTING Software (or tooling) by vendor name is key

  • Not everyone thinks the same as FP&A folks, and they need to hear the name of the tool they’re using to bridge the gap between costs and use case.

Paid readers get access to the full set of templates in a link below

• Remember this slide from the Tops Down newsletter last week? The CEO and CFO should have completed a post mortem together. Department leaders should complete the same exercise, as it relates to their domain.

Then we transition to outlining the new year’s priorities.

• Each leader should write a corresponding functional priority that relates back to what the CEO has laid out for the larger company

  • Doing so drives home the point that there are only so many budget dollars to go around, and they need to be aimed at the same goals and initiatives

• This is (drum roll, please!) followed by headcount planning

  • People make up ~75% of costs at most tech companies.

  • Leaders should present an org chart that takes into consideration:

    • Butts in seats today

    • Roles currently being recruited for

    • Roles budgeted for but not being recruited for in the current year plan

    • Future roles they need in the next year

This is the most important part of the bottoms up planning exercise. Here’s how you get it right: