Annual Planning: A Startup’s Blueprint for Sustained Success
Oct 25, 2023|
Eclipse Partner Marc Stoll shares insights on crafting a winning Annual Plan, drawing from his experience leading companies, like Apple and Anaplan, and as a board member at companies like Arista Networks.
In a market teeming with economic uncertainty, effective annual planning and cost management has never been more crucial. Startup founders must address a myriad of nuanced questions:
- How can we plan effectively in the face of a market contraction with volatile sales, where a single deal can significantly alter the overall outlook?
- What is the optimal approach to setting targets, and for what duration should they spend?
- Is it more advantageous to adopt a "top-down" or "bottom-up" approach in plan development?
- How do we prepare for uncertainty in the planning process?
- How do we get people to use the plan knowing it may be quickly outdated?
Having led annual processes for decades at companies of all sizes and stages, I've seen that these details truly matter — they’re the difference between a startup’s triumph or downfall. But, when done well, your approach to planning, including your choice of vocabulary, methodology, spending control, and approval allocation, forms the bedrock for the operating discipline you need in order to build an enduring company. Meticulous planning is even more critical in physical industry startups as the notion of “move fast and break things,” simply doesn’t work in areas of cancer treatment, manufacturing, or logistics.
To help founders avoid common mistakes in yearly planning, I'm sharing a roadmap I’ve used to steer businesses of all sizes toward long-lasting success, including Eclipse portfolio companies.
Step 0. Set Your Vocabulary — Then Stick To It
Start with the basics: define the planning lexicon. Nailing your language is key to avoiding misinterpretation among teams. Terms like “Annual Plan,” “Operating Plan,” “Budgeting Process,” or “Business Forecast” can easily blur in the fast-paced startup grind. On top of that, these terms have different meanings to leaders, depending on their prior experience.
Think of this as setting the vocabulary for your business.
The following vocabulary leads to the highest precision and clarity:
- North Star: this is the company’s mission, purpose, and why it exists.
- Long Range Plan: this is a 5 year financial plan focused on achieving the North Star. It’s the model used in fundraising and/or the plan that was shared with the board when discussing market domination.
- Annual Strategic Plan: this is a clear articulation of the 3-5 strategic objectives, inclusive of clear measures for success that must be achieved this coming year to ensure the company is on track towards the North Star.
- Annual Operating Plan: this is distinct from the traditional “Annual Financial Plan.” It’s a comprehensive financial plan for the next fiscal year that goes beyond a simple model and includes operational drivers to ensure the achievement of the Annual Strategic Plan.
- Department Operating Plan: this is the department-specific version of the Annual Operating Plan.
- Financial Targets: this is distinct from “Budgets.” These are company and department-level targets that guide leadership in executing approved investments within a specific timeframe.
It’s important to take note of three fundamental mindset shifts I’ve made by deviating from conventional business vocabulary. These decisions come with purpose.
First: changing "Financial Plan" to "Operating Plan." This emphasizes that planning involves the entire company beyond just the financial performance of the company. It encompasses core operating metrics, performance, and accountability of the business.
Second: creating a deliberate link between “Strategic” and “Operating” plans. This is something that goes overlooked all too often. Annual planning is often reduced to a financial exercise and can be simplified into an Excel model; however, the more we can link financial performance, or its realization, with department or company-level strategic goals, the better equipped you are for in-period adjustments. In fact, it should connect directly to the attainment of your strategic objectives. Why does this matter? I’ve seen companies achieve their Financial Targets, but completely miss their strategic objectives. In doing so, they put their business at risk over the next year(s) and jeopardize their progress toward achieving their North Star. Achieving both is key and it’s what makes winning so difficult.
Third: changing “Budget” to “Financial Targets.” I really — I mean really — loathe the use of the term "Budget.” It connotes an unrestricted control over money by department or functional leaders. Instead, I use "Financial Targets" to promote precision, discipline, and control of investment allocation; reducing the need for later retractions or clawbacks. More on this later as this speaks directly to culture and can spark internal controversy.
Let's dive into the integration of Strategic and Operating Plans through a few core pillars of planning.
Step 1. Define Your Strategic Plan
Annually, and ideally every six months, convening for a leadership session is critical to reflect on the foundational question: are you on track to achieve the North Star? This session should culminate into 3-5 annual strategic objectives that the company needs to achieve. Some companies use frameworks like OKRs, Jobs To Be Done, Cascade Goals, or some simply call them objectives. Unlike the aforementioned terms and definitions, I’m not concerned with which approach to use here. I have an opinion, but what I care most about is:
- You have 3-5 goals that are clearly defined. And when I say defined, I mean doing so in such a way that the entire company can articulate them.
- The success or failure of delivering on these objectives is measurable.
- The timeline for achieving these goals is well-defined, and everyone in the company is aware of the metrics.
Department leaders should digest and internalize these aligned objectives, collaborating with their teams to ensure that their work for the coming year aligns with the corporate strategic objectives.
This may seem trivial, but getting alignment is really hard. Why? By clearly defining your work and what you aim to achieve, you are agreeing on what you won't be working on. These are among the most critical discussions like, “If we commit to do this, does it mean we are not doing that?” The best companies in the world define these distinctions, gain alignment, and ensure unwavering adherence. No exceptions.
Steve Jobs said it best in a meeting during my time at Apple. He said (and I am paraphrasing here), “The hardest thing in business is saying no, but it is the most important thing to gain clarity on. The reality is, I only have one “A” team and they should only work on “A” projects. I will not have a “B” team working on “B” projects” and a “C” team working on “C” projects.” The message had a lasting impact on me, and I now appreciate why alignment on the areas that you are and are not choosing to work on is critical and why this is so hard to do. But I’ve also witnessed what happens when you do this well — you build Apple.
Step 2. Top-Down: Build Your Annual Operating Plan
Start from your Long-Range Plan. This plan is derived from the North Star, bringing the next five years into focus. It’s the vision presented to raise capital — what you dream about when your company is truly successful.
In the Long-Range Plan, you should outline broader financial and operational goals, such as capturing X% of the target market, achieving a certain level of bookings growth or product mix targets, or achieving expense-to-revenue-ratios that outperform similar public companies. These targets serve as the building blocks or drivers for the Long-Range Financial Model that is built from a perspective referred to as “top-down.” Meaning, you are leveraging macro financial and operating drivers, which offers greater flexibility for scenario planning and links your performance to more encompassing business performance targets.
To transition from a five year plan to an Annual Plan, first revisit the Annual Plan and expand and refine it as needed. Then, align on the Financial Targets for the business for this coming fiscal year. This includes financial and market-related objectives that contribute to the Financial Targets for the year. For example:
- Achieving Bookings of $X
- Reaching $XM in Annual Recurring Revenue (ARR)
- Maintaining Customer Acquisition Cost at $X
- Growing Spend by X%
- Targeting Monthly Burn of $X
- Ending with $XM in Cash
These targets may be aspirational, but they must also be grounded in reality of what is practically achievable because this process defines the envelope for financial performance for the coming year.
At this point, you’ve built a detailed top-down model that’s consistent with your Long-Range Plan and yet, precise enough to define the spending limits and financial goals you feel are achievable. Equally important, this plan should ensure the financial achievement of your Annual Strategic Plan. Now, be aware that this is an iterative process typically between the head of finance (CFO and head of FP&A, if you have those) and the CEO. It may include other leaders, but my advice is to keep the team in this process small.
Now, the real work begins…
Step 3. Bottom-Up: Build Your Annual Operating Plan
Now, it’s time to broaden the aperture by involving each department’s leaders. Armed with their envelope of spend as a target and the Annual Strategic Plan, you’re ready to distribute the envelope of spend to each department and request that each leader submit a list of prioritized investment requests. I strongly suggest requesting investment feedback in three very specific categories:
- Headcount: how many FTEs are required within the respective department?
- CapEx: is capital expenditure needed? If yes, how much and for what?
- Program Spend: this encompasses consultant spend, true program spend (e.g. a company-wide quality management system), or software spend (e.g. a CRM platform).
Ensure that department leaders are prioritizing investment requests (1-n) with clear justification tied to shared strategic or departmental goals. Finance will consolidate inputs from various teams, throw them into the mix, and compare them to the top-down view of the spend envelope.
During this process the finance team needs to build a bottom-up build of top-line performance, which includes Bookings, ARR, and Revenue (as relevant). This is about defining our top-line performance in accordance with our core business drivers, transitioning from broad macro drivers to drivers that are closest to the business and, therefore, measurable within our operating period. This effort turns the standard “Financial Model” into what I refer to as an “Operating Model,” because you are defining the operating drivers (measures) of the business. For example, with an enterprise salesforce you most likely will think about Bookings in terms of the following:
- # of sales executives in period
- Ramp time to productivity
- Quota per sales executive
- Average attainment of quota
- Average sales executive attrition
- Average time-to-fill requisitions
This will look completely different for a marketing-led demand sales process or a channel-led sales process, but should align with your go-to-market strategy.
Let’s take inventory of where you are in the process. At this point, you’ve integrated your bottom-up investment requests with your bottom-up revenue and bookings build. This enables you to compare them with your top-down annual model and spend envelope. In other words, you’re now able to compare your bottom-up financial model to your original top-down model. Now you know where you are over/under, where you need to trim, and where you might want to invest more.
Step 4. Interlock: Tie Your Strategic Goals with Your Final Operating Plan
With the departmental requests in, it's time to align the two plans — a step I call the "interlock." This is a pivotal process and I recommend approaching it department by department. During the interlock, the leadership team carefully examines both the Strategic Plan and departmental requests, engaging in careful discussions centered on trade-offs and ruthless prioritization. For example, you may have to spend more on engineers to deliver on specific product objectives within R&D. Or you may invest more on Implementation and Customer Success to achieve your net-dollar retention targets.
The ultimate goal is to frame the Annual Operating Plan with real, tangible business drivers and investment requests, all while ensuring achievement of the Annual Strategic Plan. This is what you’ll eventually hold yourself accountable to every week, month and quarter, maintaining a firm grip on your performance.
Finalizing the Annual Operating Plan is a massive undertaking, but, in the end, it results in clear alignment across the leadership team on approved investments, areas of risk, and a realistic understanding of the challenges in achieving your Annual Strategic Plan — all of which I can guarantee won’t be simple.
With this, you are ready for Board approval and implementing the plan with Financial Targets.
Step 5. Approval and Financial Targets
The Board approval process differs from one company or Board to another, but my advice here is to brief critical board members prior to the approval meeting. You never want to surprise or seek approval on critical strategic items like this without prior conversations and alignment with key stakeholders.
Following approval, the next step is to issue Financial Targets for each category of spend for a maximum of two quarters. I like to think of it as approving specific investment requests, not just allocating a sum of money in the form of a “Budget.”
- Sales: uplifting topline financial targets to ensure a buffer in your plan
- Headcount: $X total dollars, encompassing a base head count of X and inclusive of X new hires
- CapEx: X new Gen7 Machines for facility X or program X
- Program Spend: approval of the QMS system request
As you can see, these are very precise, targeted, and focused approvals that directly link to their allocated expenditure.
To reiterate, I loathe the term “Budget” because it implies that you are giving a department leader a pot of money, over which they have complete control and can adjust spend as they deem fit. This approach isn’t effective because all investments are not created equal. They can each have different accounting treatment and, consequently, different impacts on achieving your Financial Targets. In addition, I always say headcount is the gift that keeps on giving, meaning that once hired, you bear the cost burden forevermore; whereas with consultants, for instance, you have more flexibility to adjust as needed.
Fair warning, in my experience this mindset shift can sometimes be met with resistance from department leaders, as they may perceive it as a referendum on their leadership skills. But this approach is not a reflection of any one leader’s quality or their decision-making prowess. Rather, it’s to ensure that you have all available options on the table to achieve the Annual Operating and Strategic Plans. That’s why you have precise investment approvals for a defined time-frame.
This mindset shift is critical because the path to achieving the company’s Annual Plan is rarely linear. Running into internal system shocks (e.g. leadership departures, a delayed product launch) or external shocks (e.g. the collapse of SVB or the contraction in manufacturing spend). So, having clear, precise control over approvals and spending, as well as priorities, give you the flexibility to easily adapt, pull back, change investment.
In addition, it is important to establish that dollars are nonfungible, and approvals do not automatically carry over from one period to the next. This approach might appear more rigorous than the norm, but has proven instrumental in preventing costly mistakes.
If teams don't meet the targets for their intended purpose, then the money is returned to corporate for redistribution based on business performance, market conditions, and prioritization of investments. This is why it’s critical for teams to do the work up front.
This new protocol brings clarity to the final operational plan and goals, enabling crucial tradeoff decisions. It fosters more thoughtful discussions, empowers us to say “no” to certain investments, and helps us prioritize funding to critical areas. It’s also more efficient to take action and course correct as needed: underperforming areas can be shut down, and excessive spending on CapEx or consulting programs can be reduced immediately. It truly takes the guesswork out of “where do we spend the next one dollar.”
Ultimately, the added rigor in delineating key Financial Target categories fosters a "one team" mindset, cultivating a culture of accountability and ownership. In my experience, this approach offers the best optionality for businesses to adapt to changes in performance or market conditions. This cannot be undervalued.
A successful year demands detailed planning beyond basic business practices — the details matter. I believe that comprehensive, purposeful, and disciplined planning can make or break a startup.
Often, startup teams may mistakenly believe they're planning effectively, but, in reality, lack alignment on goals, clear definitions of success, the optimal path to achieve it, and the necessary levers for adaptation. By maintaining an intricate connection between strategic and operational plans, as well as specific investment opportunities, you can secure next year's goals and pave the path for sustained, long-term success for years to come.
I'd love to hear from you: if you have any questions and/or feedback, please reach out: marc [at] eclipse [dot] vc.
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