“Plans are nothing, but planning is everything.”
Dwight D. Eisenhower, President of the United States from 1953 to 1961, famously spoke these words.
What you can learn from this quote: The significant time investment of creating an annual budget is typically not worth it simply for the sake of producing a P&L for the following year.
That’s because the business environment changes rapidly, and it’s difficult to predict performance several months ahead - no matter how much time and resources a company devotes to the task.
The real value comes from the planning process itself. Doing it well sets the company up for organizational learning as it progresses through the following year.
Here is how to run Annual Planning effectively:
Start by taking a step back to see what worked and what didn’t work this year. Which strategies were successful, which failed, and crucially: why.
Work with your business partners in other functions to create a joint plan.
Make sure it’s not just Finance who creates the plan and that the teams responsible for achieving it take on a leadership role. Otherwise, the plan won’t be detailed enough, and you won’t have the buy-in necessary to ensure accountability.
Create the plan by starting with the vision, which translates into strategies and action plans. Unfortunately, many companies make the mistake of stopping with the strategy and don’t develop action plans. That often leads to surprises when it turns out that execution takes on more resources than expected.
Develop risks and opportunities for each significant action plan. That gives you ranges instead of point estimates. As a result, teams think more deeply about what may go wrong and where we may have additional opportunities.
Have a top-down and a separate bottom-up plan. The former tends to lean aggressively, while the latter is typically on the conservative side. By comparing the two to each other, we can achieve a more realistic plan. Use ranges to iterate without losing time with endless discussions.
Ensure assumptions are falsifiable. This means next year, you need to have the ability to show with data whether the assumption was correct. Then, root cause analysis can reveal how the company can improve its performance going forward.
Remember: the finished plan is a commitment, not a forecast. Therefore, you should maintain regularly updated rolling forecasts throughout the year that show the variance to the plan to determine how the company can get back on track to meet its commitment.
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