An Improved Strategic Planning Process

Starting with the big picture before getting deep into a spreadsheet

(This is Part 1 of a two-part piece on an improved strategic planning process. Part 1 focuses on the big picture, which I think is the harder part that is most often overlooked or given short shrift. Part 2 will dive into the tactics and details of crafting a thoughtful, detailed budget.)

The annual budget process has come up in number of recent conversations I’ve had with CEOs, COOs and Finance Leaders. Among the many things I have heard are the following:

“My CEO just told the finance team that we need to prepare a draft budget for her review. And that the Board is expecting that we show 100% growth year over year.”

“How can we improve our annual planning process?”

“How do we ensure everyone feels ownership in the budget?”

“Should we have multiple plans – a base (downside), a target (goal) and an investor (upside)?”

A Successful Planning Process Requires CEO Leadership

The CEO owns the vision.  Both the 5-Year Strategic Plan and the annual Budget are numerical representations of the CEO’s vision for the business.

CEOs are tempted to short-circuit what can be a painful process by asking the finance team to produce a first cut at the annual budget or the 5-year plan.  This sounds like a reasonable approach. After all, numbers and excel are the primary responsibility of finance. Finance knows the data best. And the goal is to create a set of financial targets for revenues and expenses.

I counsel all CEOs to resist that temptation. Revisit the vision first in detail with the Leadership Team. Encourage them to ask questions and offer critiques. Don’t begin work in a spreadsheet until the entire Leadership team is aligned around the vision.

Vision and Purpose are more Effective Motivators than Financial Targets

As CEO you know the vision like the back of your hand. You created it. You might even think about it every day. Remember the rest of your company is mostly focused on their tasks for that week and can lose sight of the vision in doing their daily job.

Sometimes the vision might change a bit, as you learn more about customers’ needs and the market.

Although the strategic or annual planning process results in Board approved targets for revenues, growth rates, margins and cash flow, these numbers are simply outputs.

Even though financial incentives matter to all of us, I’ve never found numbers and promises of future compensation sufficient to motivate an organization to act in the best interest of all stakeholders (customers, employees and investors) over the long-term.

Revisit the vision (the future state) and the purpose (why this company exists) at the start of each planning process. These topics present opportunities to inspire and energize the team. And this discussion will often spark creative thinking about how best to solve problems facing the business.

A Budget is a Guide to Reducing Risks and Unlocking Future Value

In early stage or emerging growth companies, the need for an updated business plan or budget is often driven by a desire to secure another round of financing. Even for businesses that are self-funding, thoughtful budgets and business plans are necessary for a future sale or IPO. For public companies, the key elements disclosed in the annual budget allows investors to fairly value the business and create a robust market for the stock of the company.

A thoughtful budget contains a roadmap on how to mitigate many of the risks facing the business. The thinking behind the assumptions that underpin a budget explains how the company plans to mitigate those risks. When investors gain confidence that there is a plan to reduce business risks, they are willing to attach a higher probability to forecast revenue and cash flow targets in a budget or 5-year plan.

As we all know, businesses are valued on future cash flows. Thus, when investors believe the budget is based on achievable and thoughtful assumptions, they are likely to assign greater value to the business.

Think like an Investor

Everyone who interacts with the business—employees, customers, vendors and investors—are “investors” in the business. They are each investing a combination of their time, their services and their capital. If the business struggles, they may not get paid or receive the services they purchased. If the business succeeds, customers will likely benefit from better quality products/services over time. Employees and investors should share in financial gains.

During the planning process, evaluate your business as a new investor would with healthy skepticism and an outsider’s perspective.

The Key Categories to Evaluate

In thinking like an investor, I recommend the Leadership Team evaluate several key aspects of the business as they are today with radical candor. And then, turn to the discussion towards how best to advance each category towards its future ideal state.

The categories I would recommend discussing in detail include:

1.       Product(s): What are the problems your product solves today for customers today and in the future??

2.       Market: How large is the market for your product? How fast is it growing? Who is your ideal customer today? What geographies can you target now, and in the near future?

3.       Go-To-Market: How will you reach your ideal customer cost effectively? Are there new paths to market you need to explore or invest in?

4.       Unit Economics: What is the return you earn today on a new customer over their lifetime with the business? And how might you be able to improve that return (through both a faster payback and a higher total payback)?

5.       Cash (Runway and Needs): On your current trajectory how many months can the business survive with the cash it has before it needs to raise additional capital? How much cash will the business need to achieve the vision the CEO laid out?

6.       Team: Where are the holes in the team today? Where do you need to add talent and headcount to achieve the vision?

For each of these areas, identify what milestone(s) can be achieved over the course of the coming year. Select milestone which are both achievable and would demonstrate tangible progress in each area.

Prioritization

Steve Jobs is famous for reminding leaders of the importance of saying no.

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying ‘no’ to 1,000 things.”

At this point of the budgeting exercise, you will have surfaced a large number of important initiatives that several members of the Leadership team favor pursuing in the next year. The tendency of most CEOs, who are natural optimists, is to undertake many or all of these initiatives. They’re good ideas after all.

Sheryl Sandberg, in an interview, said that to run a successful business, a leader must ruthlessly prioritize.

“…ruthless prioritization means only focusing on the very best ideas. It means figuring out the 10 things on your list and, if you can't do all 10, doing the top two really well.”

The vision can and should remain expansive. The business plan for the next 12 months needs to be focused.

How to choose amongst all the great ideas advanced by the various department leaders?

I would recommend prioritizing those initiatives which would most reduce risk in the business. Paying attention to the order in which items must be undertaken (e.g. invest in product upgrades before opening a new channel to market whose success depends on an easier to use product).

Focus and prioritization will ensure you can communicate the company objectives for the coming year succinctly to all employees. That clarity will increase the likelihood of hitting or exceeding the plan.

The result of all the effort put in by the Leadership Team so far in the planning process is:

(a)    A clear vision of where the company is going.

(b)    Milestone to achieve which will show progress towards and vision and reduce business risk.

(c)     A series of prioritized initiatives to undertake in the coming year.

It is only now that the finance team should begin work in a spreadsheet.

(Look out for part 2 in the next few weeks. I welcome feedback. If you like this article please forward it to other you think might enjoy it.  Also you can subscribe to my free newsletter at the link here.)