Best Practices

Why it's critical to Shift from Annual Planning to Continuous Planning in Finance

"What's the plan?" This is a question that company leaders are accustomed to answering, even though it's impossible to predict the future perfectly. 

Historically, company leaders strove to make annual plans they could refer to throughout the year. Leadership and their teams would sit down annually and think about what they wanted to accomplish and what needed to happen to get there. The annual plan was more or less set in stone, even if things changed along the way. 

The thing is, as soon as we make an annual plan, the underlying assumptions might change, rendering it obsolete.

The COVID-19 pandemic has been the starkest example of how quickly things can change and invalidate many of our best-laid plans. It's shown how we need to continuously adjust our heading based on new information. We need to answer questions like "If our company's growth has stagnated, what will we do differently?" or "if we're on a sudden upward growth trajectory (think Zoom) propelled by circumstances out of our control, what should we do to take advantage?"

For today's companies, one-time annual planning just doesn't work. In its place, we're seeing the most successful companies move towards continuous planning and continuous forecasting. As the former COO of Udacity and the co-founder of Vareto, I'm sharing my take on what makes a good operational plan and ideas on how you can create a continuous one. 

What's a good operational plan?

Before diving into creating a continuous company plan, let's go over what makes a good operational plan in the first place. A solid operational plan will be flexible and provide visibility so that you can change course and adjust any time.

The best operational plans:

  • Account for nuance. When creating a plan, it's tempting to plan for the absolute best-case scenario, but the best plans consider the nuance of an issue. For example, while building a plan for a sales organization, it's essential to account for sales team members' expected ramp time and performance based on their experience relevant to the industry.
  • Are continuously explored and updated. All operational plans should work on a 12-month rolling basis. It's important to get into the habit of refining the plan monthly or quarterly so that it's always accounting for the next 12 months.
  • Identify key trigger points that necessitate changes to the plan. Because it's impossible to predict exactly what will happen, it's vital for the plan to include trigger points that will signal that the current course needs to be changed. For example, many companies might change their plan based on changes in top-line growth or decline, customer churn, expenses, etc.
  • Get every relevant player involved. An operational plan is meaningless unless leadership and key stakeholders are bought into those strategic initiatives. It's important to have key functional leaders involved and accountable.
  • Require the visibility you need to take action. A plan itself may not give visibility, but well-integrated tools will. Having up-to-date, accurate insights at your fingertips is essential to adjusting your operational plan as you move along.

How is a continuous company plan created?

Get leadership onboard to align on strategic objectives

Everyone in leadership needs to be involved and have visibility and alignment with the company's top-level objectives. Leadership also needs to align on a list of key and manageable strategic initiatives that will help the company achieve its objectives.

Identify leading and lagging indicators

In order to update and adjust the plan, it's important to identify the key metrics to track to see how the company is doing. These leading and lagging indicators will show when it's time to shift gears. Some examples of these indicators:

Leading indicators:

  • Marketing-to-Sales conversion rates
  • Sales pipeline coverage
  • Sales team hiring vs. plan
  • Annual recurring revenue

Lagging Indicators:

  • Revenue
  • Ramped sales team firepower
  • Install base retention, expansion, and churn
  • Operational expense and EBITDA

Gain visibility through well-integrated tools

A plan is useless without instant visibility into the status of Actuals vs. Plan (also called BvA), and leading and lagging indicators. There are a wide array of tools that can be integrated into company operations to give the visibility needed. FP&A platforms need to integrate with and bring in data from CRM (e.g., Salesforce, MS Dynamics), ERP (e.g., NetSuite, SAP, Oracle, Intacct) Marketing (e.g., Marketo), and HR (e.g., Workday, BambooHR) systems. Hiring tools, such as Lever or Greenhouse, should be integrated as well, so it's possible to keep a pulse on the status of your hiring efforts as you grow.

Create multiple versions of a plan to account for different scenarios

A common mistake is that companies create only one plan when they really need to have multiple versions of the plan based on different scenarios and trigger points. Companies should create a "most likely" plan, a "stretch" plan (which accounts for the best-case scenario when performance is better than expected), and a "doomsday" plan (which accounts for scenarios like Covid-19 which could have severe negative impacts on company performance.) If the company has moved into the realm of a "stretch plan", they might allocate more investment dollars towards hiring to accelerate sales or build out a new product. At the same time, a "doomsday scenario" may necessitate hiring and expense controls to increase the runway.

Review performance vs. plan regularly, and make changes accordingly

The biggest key to a successful operational plan is to review it on a regular basis, especially with regard to performance. That way, if things deviate from expectations, necessary adjustments can be made. This makes the organization more proactive. For example, suppose sales have been significantly higher than anticipated in the plan. In that case, it's time to start thinking about how and where additional cash can be deployed to grow the business.

Different metrics can be reviewed at different cadences. For example, website visits can be reviewed daily, sales pipeline can be evaluated on a weekly basis, and revenue and ARR can be tracked monthly. Make sure everyone knows what part of the plan they're responsible for looking into, keeping track of, and reporting on.

Create a plan-based reward and incentive structure

Bonuses and incentives are often awarded on an annual basis due to the nebulous idea of team member performance. Many companies are now moving to offering rewards and incentives based on how well team members collectively deliver. Aligning the incentive structure to company-level outcomes drives every leader's mindset toward doing what's best for the company. For example, if a team knows they will be rewarded if they're able to deliver a planned feature within a certain timeframe, they'll be motivated to achieve that result. 

The living, breathing operational plan

An operational plan is a living, breathing document that ebbs and flows based on what's happening in the organization, not something created and discussed once per year. The best operational plans are reviewed regularly and updated on a rolling basis to account for the next 12 months.

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