Annual Operating Planning is an important activity in many organisations. Some refer to it as budget season and every organisation has its own nomenclature such as AOP, OB, LRBP, etc. This article covers best practices for a successful planning season, explains what best-in-class organisations do to create a solid annual operating plan and answers three burning questions.
What is the ideal time to kick off your planning season?
Most organisations operating on a calendar year begin their planning cycle in the autumn. The challenge lies in finding the ideal amount of time to spend on this activity. If you start too early, you are in a perpetual budgeting cycle which creates organisational fatigue. If you start too late, you are in a fire drill situation and mistakes can happen.
A natural tendency for line of business leaders is to want to have as much data as possible (in the form of actual results) prior to making commitments for the following fiscal year. This can have the unfortunate effect of landing in the starting too late category.
The nuance in when to start truly lies in understanding who starts what and when.
- June: FP&A has the opportunity to begin very early (even in summer) to start assessing systems, templates, input methods and calendaring. Any system testing that is needed should be completed at this time. An administrative lift of this nature serves the rest of the organisation and imposes few burdens.
- July: Re-engagement between FP&A and leadership around long term plan objectives and how they align with the current operating plan year is a crucial first step in understanding context for the plan. This step either affirms or rejects the long-term plans and level sets the organisation in the appropriate direction and investment strategies.
- August: FP&A partnership involves assigning members of the FP&A team to Line of Business leaders across the entire organisation. This relationship is the most crucial aspect of gathering context and data for the build-out of the various pieces of the plan be they a product line, an overhead department or a geography.
- September: Kick Off Meetings offer the company a window into the upcoming calendar and information that the FP&A team seeks to gather in the planning process. These meetings are not solely about dates. They begin with a discussion of corporate objectives and follow through all the way to how certain details in specific natural accounts will be gathered.
- October: The build-out of the plan through the FP&A partnership should take no longer than a few weeks to complete. It should include not only data collection in step with the Chart of Accounts but all necessary sub-modeling should be built. Examples include sales quota and revenue alignment, commission modeling and headcount modeling. A first iteration should be achieved in this timeframe so that a second iteration based on leadership’s feedback can be accomplished.
- November: Revisions to the initial build should be completed and final numbers sent out for review to all participants and owners in the process. Finalisation of the data and a full P&L, Balance Sheet and Cash Flow Review takes place with C-level executives. Once consensus has been achieved it is highly recommended that each business leader completes an official attestation of the final operating plan numbers so as to avoid any confusion going into the fiscal year about what has been agreed to. This attestation step may seem bureaucratic but it saves a tremendous amount of time when it comes to reviewing performance vs. plan and the payout of bonuses.
- December: Once the numbers are final the build-out of the business narrative can begin for formal presentation to the board of directors.
How can FP&A avoid the most common pitfalls in the planning cycle?
Each company has its own challenges when it comes to communication, engagement with FP&A and the planning cycle. There are a number of common pitfalls and avoiding them can make a big difference in everyone’s annual operating plan experience.
- FP&A starts late. There is no need to waste time on administrative items closer to the kick-off. Recall that planning season sits on top of an FP&A teams existing and routine + ad hoc FP&A responsibilities.
- The amount of organisation-wide engagement is too long. Keeping the planning window short for key stakeholders outside the FP&A process is crucial for avoiding organisational fatigue and disengagement.
- Key dates in the planning calendar are missed. A calendar designed with a cushion is key to avoiding this pitfall. Missing dates leads to hurried deliverables with errors and loss of credibility for the FP&A function.
- Skipping the attestation step. The attestation seems like such a simple item as it is but a sign off. In reality it can almost be as important as the numbers themselves. Attestation sets the organisation up for success and protects all participants in the process from arguing about what the final numbers were as they progress through the plan year.
- Absence of sub modeling. Often times in the race to complete a plan there are items that should be modeled separately that are not. For example, detailed modeling that aligns revenue not only to growth objectives but sales quotas makes a big difference.
What is the best way to drive business objectives through the planning cycle?
Organisations should have sub-processes that support having a perspective on a full year at any given point in time. Rolling forecast cycles outside of the annual operating plan allow the numbers to be built out for 12, 18 or 24 months at a time. A strong sub-process allows organisations to spend more time on the story of the business. If those regular long-term projections are in place at a detailed level (i.e. department and natural account) then the team can spend more time on:
- Leading indicators
- Vetting long term plan objectives
- Key performance indicators
- Investment strategy and ROI
- Competitive landscape
- Targeted growth strategies
In addition to spending time on the thinking beyond the data, organisations should do a post mortem on each planning cycle to understand a number of key items:
- What went well and what did not?
- What data points were missed and why?
- How did the company perform as compared to what was planned?
- Were there any system problems?
- Are there other areas of sub-modeling that would have enhanced the quality of the forecast?
For a successfully built annual operating plan, FP&A has to plan to plan. There needs to be a solid amount of preparatory work, frequent communication with leadership and attention to calendaring and the achievement of deliverables. There are many pitfalls but perhaps the biggest pitfall is lack of alignment on what the final numbers are. This can be avoided with adherence to an attestation process. Finally, best in class organisations leverage FP&A sub-processes to set themselves up for success.