Conquering the Dreaded Annual Plan
The Power of Disruption

Taming the Annual Budget


While you are thinking about the overall strategy and initiatives for the upcoming year, you must also prepare a budget that enables you to fund these efforts. Generally speaking I’m in favor of a bottoms-up approach to management. However, when it comes to budgeting, a top-down approach is more efficient. The senior team (CEO, CFO, COO) should develop an overall financial model which includes top-line growth targets for bookings, ARR (Annual Recurring Revenue) and expenses including headcount. This budget model should include sufficient investment to ensure that the top initiatives will succeed.

Think carefully about the skills and headcount required on new initiatives so that you’re not inadvertently overloading people and undermining initiatives that are strategic to the company. For example, if you’ve got a critical new Engineering project, it needs an owner who is 100% focused on that. It can’t be a part-time job for someone who already has more than a full-time role already.

Typically, you might converge on the financial targets using a couple of different approaches:

  • Extrapolation from prior year performance based on a targeted growth rate

  • Bottoms up quota-based revenue model, factoring in retention, expansion, churn

  • Deal-based revenue model, based on average deal size, segments, geographic regions

  • New initiatives to expand the product offering, distribution channels or geographic reach

In the startup stage, there is no one-size-fits-all model for the annual forecast. It typically requires a triangulation of multiple approaches. For example, if you grew at 70% in the prior year you might adjust that number up to reflect your optimism around new product initiatives and your desire to be attractive to new investors in anticipation of further fundraising.

If you’ve got a direct sales model, you’ll want to understand how much new bookings are required and whether you have enough sales people to achieve those targets. If you’re seeing traction with larger customers or anticipate a new premium priced offering, you might expect larger deals and some expansion with existing customers.

There’s no one single way to build the model, but you want to make sure that you’re funding the right initiatives and staffing to achieve the desired results. If you’re expecting sales to double, you want to make sure there’s sufficient management, training, headcount and lead generation to support those efforts. As the number of customers expands, so does the requirement for customer success, support and so on.

Each department should create their own annual plan and budget. This will not be as sophisticated as the company’s annual plan, but should fit in with major initiatives. For example, if there’s an overall company goal to expand into Europe that will have implications for language translation, local sales and marketing, local language support, marketing events and so on. 

Each department will have their own departmental specific initiatives through the year. For example Engineering might have goals related to improving uptime or performance. Sales might have goals related to hiring and training. Marketing will have goals around product launches, lead generation, pipeline, analyst relations, PR, etc. A departmental plan could be as short as one or two pages, and ideally no longer than five. The plan should include a definition of what success will look like and identification of any key risks that should be addressed.

Departments Must Be In Sync

You’ll want to make sure that there is coordination between the departments so that Product, Engineering, Marketing, Sales are all in sync. If there’s a product launch expected in Q2, you want to make sure Engineering and Product are clear about delivery dates and major features. Marketing and Sales need to be collaborating on launch plans, training, lead generation and so on. You also need to make sure that you don’t set every major initiative and new hire to start in Q1. You will need to temper ambitions so that things are spread through the year.

I have found the best way to do this is to have departmental leaders share their plans with their peers and collaborate together to understand who is doing what and when. This works best if the executives can get on the same side of the table and work out their needs and priorities together. It also helps to understand the “client relationship” between departments. For example, Engineering is there to build the features that the Product team needs to win in the market. Marketing is signed up to deliver content and lead generation so that Sales can close more bigger deals, faster.

While you might not get 100% alignment across every issue facing every department, you want to avoid too many gaps. I have found that Sales always wants more leads than Marketing will sign up for. But if they can narrow the gap to 15%, that’s close enough. Especially, if there’s a possibility of larger deal sizes, or expansion which can provide some relief for required lead generation. But you want to avoid a gap that’s larger or requires a miracle in the fourth quarter.

Drive Toward Efficiency

Once a company has product-market fit and traction beyond $5-10m in ARR, you will typically want to drive increasing operational efficiency. So, if revenues are to double in the next year, that may require doubling or close to doubling the size of the Sales team to ensure proper quota coverage. However, you want to be careful that other departments such as Marketing, Sales, Support, Engineering, HR, Finance expand at a slower rate. Otherwise you may never get to break-even cash flow positive. 

There can be some back-and-forth discussion or negotiation with the department heads on headcount requirements. Are they hiring individual contributors or managers? At what level of seniority or location? Also consider whether to trade-off headcount for program expenses such as use of part-time contractors for specialized skills. Asking departmental leaders to create their own bottoms-up budgets and headcount plans without top-level targets and constraints takes too long to converge. You are best off assigning them their departmental headcount and dollar budgets and asking the departmental leaders to live within those constraints. How they spend the money and what roles they require is up to them.

Be Flexible

No plan or budget can be set in stone. The business will evolve as things proceed and it pays to be flexible. For example, if instead of hiring more Engineers, there’s a need for more QA, that’s a trade-off that the head of Engineering should be able to make, as long as they are living within the overall budget constraints.

It’s worth having a mid-year check-in on the budget to make sure that things have not gone off the rails. In particular, if hiring and expenses are running high and revenues are lagging, that may require you to reconsider which initiatives to double down on and which should be scaled back.

That said, you want to be careful not to set the expectation there’s more headcount to be had with an all-new budget process. You want to make sure you’re building a disciplined approach to growing the company.


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