Your Definitive Guide to Annual Planning - Part 1: Where Do I Start?
What data do I need to start the annual planning process?
Annual planning season is approaching.
So I’ve written the most comprehensive and tactical guide in the history of Mostly Metrics.
Here’s what we’ll cover for paid readers this month:
Part I: Where Do I Start? (TODAY!)
Part II: Planning Templates and Target Setting (NEXT WEEK!)
Part III: Bottoms Up Budgeting
Part IV: How to Pitch an Annual Budget to your Board
This series will come with planning templates you can use to build your own budget.
So grab your Zyn and let’s begin.
“Where do I start?”
-Everyone
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).
Building Block #1: Current Headcount Roster
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.
Building Block #2: Open Headcount Roster
This list should be segmented into two buckets:
Positions actively being recruited for
Positions approved in the current year budget, but not being actively recruited for
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:
Get excluded from the baseline, but get filled before year end (so there’s a real life person working at the company you haven’t contemplated for), or
They don’t get filled by year end, but the department leader assumes you still had that role rolling over into the next year’s budget envelope (so they are one short when they receive it)
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.
Building Block #3: September P&L
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.
(Paid readers get access to our complete annual planning series, and the templates we’ve crafted for you to successfully build your own budget.)