A Business Builder’s Guide to Annual Planning

Author

Azlin Software
November 20, 2024

As autumn shifts into its later stages, business builders are starting to reflect on the year’s achievements and prepare for what’s next. For some leaders, annual planning is a well-honed practice; for others, it remains a process of learning, testing, and iterating. This guide is designed to support you in organizing an effective planning process for next year as you navigate the uncertainties and opportunities in a continuously evolving business.

The Annual Planning Process

An annual budget is a valuable tool for understanding how your business is doing. It provides a benchmark to track progress toward your goals and helps pinpoint where adjustments could make the biggest difference.

From working with B2B software leaders, we’ve seen that two numbers tend to matter most: growth and profitability. For growth, it’s helpful to ask, “How much do we expect to grow next year?” This involves looking at drivers like new customer acquisition, upselling opportunities, and churn. For profitability, the key question is, “How profitable do we expect to be?” Reviewing your costs—what’s likely to remain steady and what might increase—helps ensure you’re set up for a healthy cash flow throughout the year.

Focusing on these two metrics, growth of ARR or revenue and profitability in terms of cash flow or EBITDA margin, gives your team clear priorities and avoid overwhelm.

With the right approach, annual planning is an opportunity to energize and unify your team for the year ahead, instead of a time consuming burden. Here are some principles to guide you:

  • Start with Clear Strategic and Financial Goals: Set high-level objectives at the outset, whether that’s achieving revenue targets, profitability goals, or other growth milestones. Align these with your mid- to long-term vision to create a sense of purpose across the team.

  • Prioritize Cash Flow: Cash flow is critical for scaling companies. Build projections into your budget to ensure working capital is available, especially if your cash reserves are limited.

  • Tailor Your Budget Approach: Choose a budgeting approach that suits the specific needs of each area of your business. The next section dives more into different options.

  • Engage Your Team at the Right Time: Business builders and the finance leader (if there is one internally or externally) often drive the planning process, but including other key team members can improve the accuracy and relevance of expense estimates and foster buy-in for the budget’s goals.

  • Consider Scenario Planning: Modeling different budget scenarios based on potential outcomes helps you stay agile in response to changing conditions. It is especially valuable when you face uncertainties, such as when a large customer may make a purchase or when unexpected costs arise. It's always wise to include a contingency buffer in your budget to account for these unknowns.

  • Review and Adjust Regularly: Treat your budget as a flexible tool rather than a fixed roadmap. Schedule regular reviews to stay aligned with real-world results and adjust as necessary.

Starting your annual planning process in Q4 sets you up to begin day one of Q1 with a clear plan. If that’s not possible, aim to finalize your planning as close to the start of the new year as you can.

Planning early and setting out a clear timeline helps to avoid the stress and time crunch that often come with year-end responsibilities. It also gives your team more time to align on priorities and start the year with clarity and focus.

Here’s a sample annual planning timeline that you can adapt to fit your company’s needs:

Different Approaches to Designing an Annual Budget

Selecting a budgeting methodology can set the tone for your financial strategy and guide all other operational areas. Be sure to involve team members with relevant expertise, including those from accounting, sales, and product development.

Here are some planning approaches to consider. Each has its strengths, and many companies blend elements from different methods to suit their needs.

Pros

Cons

Incremental Budgeting:

A more traditional process that uses the previous year's budget as a starting point, with adjustments based on projected growth.

- Relatively simple and straightforward;

- Providing a sense of continuity and stability.

- Potentially inflexible;

- May not reflect changing priorities or market;

- May not account for unforeseeable factors, e.g., major new customers or swings in expenses.

Rolling Forecasting:

A continuous process where forecasts are updated regularly, typically on a quarterly basis.

- A more accurate picture of current and future performance;

- Easier to adjust for changing conditions and learnings;

- Encouraging proactive decision-making.

- Ongoing effort, resources, and clear ownership by a leader in the business required;

- Could lead to analysis paralysis if not managed effectively.

Zero-Based Budgeting:

Starts with a fresh perspective, where every expense must be justified and allocated from scratch, regardless of past spending levels.

- Promoting efficiency by identifying unnecessary costs;

- Encouraging innovation and new ideas.

- Time-consuming and resource-intensive;

- May not be suitable for dynamic environments with unpredictable changes.

Bottom-Up Activity-Based Budgeting:

Allocates resources based on the specific activities required to achieve organizational goals.

- Linking costs directly to outcomes;

- Providing a clearer understanding of costs and benefits.

- Complex and time-consuming to implement;

- Requiring accurate data and analysis.

Regardless of which methodology you choose, it’s important to remember that the annual plan is just that—a plan. One thing you can be sure of is that, a year from now, the results will likely look different from the plan. While the numbers in a spreadsheet provide helpful guidance, it’s the people, the challenges, and the growth you experience that truly define its success.

What About Your Long-Term Goals?

As a final thought, annual planning often prompts business owners to think beyond the immediate year. It’s not just about setting goals for the next 12 months—it can spark reflection on longer-term ambitions for the business. Some common questions that come up are, “What do I really want to achieve?” and “Have my goals shifted?”

For some, this process brings up thoughts of a potential exit and the steps needed to get the business 'exit-ready.' For others, it may inspire a vision of an even larger, faster-growing business and new possibilities for growth.

No matter where you are in the planning process or what other questions this has led you to ponder, please don’t hesitate to reach out to Annalise and Zoe, Co-Founders of Azlin Software, at [email protected]. We’re always here to answer questions, discuss your specific situation, and offer support wherever possible.

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