Navigating annual planning challenges

How to avoid common mistakes + BONUS "Bottoms Up" planning template

DEAR STAGE 2: We’re kicking off our first real annual planning process for our company. In the last year, we raised a seed round, formed a board, and hired a sales leader — a lot has changed since it was just my co-founder and me in the mix. Are there any best practices you can share for someone going through this process for the first time? Any mistakes to avoid? ~Planning for ‘24

DEAR PLANNING FOR ‘24: I’m in the midst of working through annual planning with many of Stage 2’s portfolio companies right now. Seeing how much it changes with stage of company in real time, you’re not alone! Annual planning is an intense process that involves more people, more review/oversight, and often more compromise as you scale. It’s also a critical step to getting your team aligned and ready to execute on your strategic goals. The top 3 mistakes we see in planning processes…

Mistake 1: Starting too late

The most common mistake we see among early-stage companies is starting this process in December, or even at the start of the new year. This generally means you are rushing to get something out the door, don’t have time to work through iterations and get input from the right people, and end up delivering a target to the sales team well into Q1. This makes for a (very) rough start to the year. 

So, what should the process look like, and who should be involved? There are certainly nuances and increased complexities as you scale, but for most early-stage companies, the process should follow a basic framework:

• Start early! In Q3, you should be having discussions about a high-level strategy for the coming year, and aligning around top level goals and an ARR and budget/burn target with both your board and exec leadership team. 

• As the year progresses, your planning process should intensify, shifting from high-level strategic discussions, to more rigorous and granular planning in Q4.

• Depending on the size of the company, a founder, CFO/VP Finance, or outsourced team may be taking the lead on the model. In any of these situations, there should be an owner who builds the first version of the model 

• From there, departmental leadership should have meaningful involvement in building the bottoms up plan, hiring plan, and budget requests for the coming year. Start by getting all asks on the table and then pare back as you refine the plan. 

• Your board may review iterations of the plan during Q4, but we recommend signing off on an official annual plan after the year has closed. You can do 99% of the work, but you want to ensure your final plan is based on the actual ARR and expense figures at year end v. a prediction/forecast from a quarter earlier. 

Mistake 2: Relying on a top-down plan

Most company’s start with a target and back into a plan. That’s a reasonable approach IF that top-down plan is married with a bottoms up, but there's often a gap between these two perspectives. 

Many companies have never built a “Bottoms Up” plan. If you’re in this camp, my partner, Mandy Cole wrote a great article taking you through the details - check it out here. You can also grab Stage 2’s Bottoms Up plan templates: Sales-led or PLG (make a copy of the google sheet and get to work!)

Why is this so important? If you start with your actual historical performance, you can pinpoint where there are gaps to hitting the top line target, assess the feasibility of the assumptions (e.g. it’s incredibly unlikely your team is going to double close rate overnight or your BDR team is going to go from booking 2 meetings per week to 5 just because your model needs you to do that in Q2) and map out milestones where you will evaluate performance throughout the year. 

Mistake 3: “Set it and forget it”

For later-stage companies, the plan is the plan and should not change during the year. But for an early-stage company, a lot can change in a few quarters, or even months — launched a new product ahead of schedule? Experienced headwinds do to macro shifts? Had an unexpected leave of absence from your 1 AE? These can all dramatically change your ability to deliver against the number and worth taking a step back to reassess. 

Start by setting up monthly plan reviews as a standard practice. These reviews should focus on tracking KPIs — Actuals, Forecast and Plan:

• Actuals: Historical results

• Forecast: What we expect to deliver 

• Plan: The original plan for the year

Frequent check-ins keep everyone accountable, while providing early visibility into potential deviations from the plan. If you see actuals or forecast dramatically deviating from plan, it’s time to have a conversation about why, and determine if you need to reset new expectations and adjust expenses/budget accordingly. Don't be afraid to make adjustments, even mid-year, if necessary. Waiting until the end of the year to address issues could be detrimental to your company's future success (especially if the burn gets out of hand and you are not watching the cash position closely!). This transparent approach ensures alignment with your board throughout the year. 

Annual planning for early-stage software companies requires careful timing, effective alignment, and continuous adaptation. We hope these tips will help you avoid some of the most common mistakes. By starting early, bridging the gap between top-down and bottoms-up perspectives, and maintaining a flexible approach to plan adjustments, you'll be better equipped for the year ahead.

Until next week!