Biz Doc: It Has Come To This

Annual Operating Plan: Step 2 of 4

October 2014

3YearPlanExceptional Annual Operating Plans are typically anchored to a well-crafted 3-year strategic plan.  The coming year covered by the operating plan is merely the first step in attainment of the broader 3-year vision.

Why 3 years?  In today’s world, change is a constant and the more traditional 5-year plan simply does not hold to any reasonable trend-line.  My preference , based on experience, is a 3-year strategic plan, with an annual look-back to test the accuracy (and sanity) of the previous plans.  Development of the 3-year strategic plan should be tested against the Mission and Vision (found in this post) to confirm alignment.

Following the review and validation of Mission, Vision and Values, the 3-year strategic plan session is kicked-off with a robust discussion of Sales, Product and OpEx. The CEO should moderate effectively and draw all executives into the fray.  Ideation should not be snuffed out but illogical thinking should be called out with clarity and force. Executives in the room are expected to exhibit market sensibilities, functional expertise, financial acumen and “ownership thinking.”  If not, they do not belong in a room discussing the future of the company (which will impact the lives of the broader employee base).

1. Start with Sales and Build Forward Targets at +12, +24 and +36 Months:

Assuming the Annual Operating Plan meeting takes place in mid October (my suggested calendar is found in this post), the current year’s revenue and achievements are in view.  From there, a reasonable stretch-goal for 3 years can be crafted.  The questions to ask include:

How fast is the sector growing?  A firm must meet / beat that % to maintain / gain market share.  When such growth estimates are applied, what do the 3 years look like from a sequential  top-line revenue perspective?  Does this pass the sanity test?  How fast is gross margin growing?  What floor should we set for each of the next 3 years?  (To me and those who think like me, Gross Margin is EVERYTHING.)

2. Move to Product and Validate Readiness (or Not) to Hit Targets:

Where should the product or service be in 3 years?  Are the planed product updates sufficient to support the top-line revenue forecast?  What will it take in R&D to pay for that?  A review of the product road-map should take place at a high level with detailed discussions reserved for the separate time allotted to craft current year objectives.

3. Then Perform a Sanity Check on OpEx:

What will happen to SG&A expenses?  What marketing spend is needed? Is the back office in place to support the revenue level, support, accounting transactions, etc?  How big will headcount become?  When will new facilities be required?  All such items should be brought forth and this will certainly not be the first time they are discussed.

4. Have Finance Model LIVE In Macro Strokes:

This should be an instructive session where the executive team sees their presumptions come to life in a proforma P&L.  They should evaluate and ferociously protect  what I call “scale, scale and scale.”  Specifically, Gross Margin scale, Opex scale and EBITDA scale.  If Gross Margin scales in the face of rising revenue with rational OpEx costs in check, it’s generally difficult to screw-up EBITDA as it should take care of itself.  Bonuses are paid for in EBITDA… except at start-ups and dysfunctional companies losing money while possessing (for now) the balance sheet strength to serve executive greed.

Once the 3-year strategic plan is challenged sufficiently and agreed upon, step 2 is completed.  The foundation is intact to create the Annual Operating Plan and 1 year of goals, objectives and budgets, which should be a fairly straightforward exercise.  (That is step 3 and it will be detailed in an upcoming post.)


Leave A Reply

Your email address will not be published. Required fields are marked *