2011 Annual Planning Discussion with examples

Happy New Year!  It’s 2011 and for many start-up cases, it’s time to finalize and approve the 2011 Operating Plan.  Actually, it would be ideal to have started the 2011 planning cycle around the mid-point of Q4 last year in order to accomodate how the year ended and time enough to work through the plan thoroughly, with the entire executive team…any maybe you’ve done exactly that. Either way, here’s a few things to think about and even use if you’re still in the planning process.

Why plan in the first place?

When you have an executive team, investors and a board of directors, it’s critically important that everyone be on the same page regarding the company’s current and go-forward operating metrics:   how much money will be spent and on what?  over what period of time?  how many employees will be hired and into what positions?  how much revenue will be generated and by what means?  how much cash exists and when does cash run out?

The operating plan is the company’s opportunity to call it’s shot and be held accountable for the next chunk of time. And because the company and its leadership team is accountable for the plan, the board and investors have the obligation to allow the company a considerable degree of autonomy to execute to the plan relative to expense, hiring, and so on so long as the plan is being achieved.  And while it’s imperative that execution of the plan materially advances the business, my constant recommendation is to “under-promise and over-deliver” in all areas.

The goal of this post, like previous “investor pitch” and “board meeting” posts (both of those posts will be updated closer to summer time) is to provide a starting point and example materials for a reasonable annual planning effort for early-stage start ups.

What are the elements of an annual plan?

The Planning Process

Every company is going to have a different process for creating their plan; here are a few suggestions and questions to keep in mind, in no particular order:

• be inclusive and solicit real-time feedback from the entire executive team during the process
• start within the company and then expand out to advisors, board members and investors
• focus on “what is the most important” thing to achieve during the planning period and associated investments
• if your plan shows dramatic deviation from prior periods (expense/revenue ramps or falls quickly) – thoroughly understand why and if it is reasonable
• are you “under promising” on key metrics?  are you likely to “over deliver” on the plan?   the converse of either is not good.
• are you willing to stake your reputation and career on the fact that your company will hit this plan?  if not, that’s a warning sign.

After the company has created the plan and socialized it appropriately internally, it’s helpful to discuss with outside advisors or a subset of the board before going for final approval.  Get feed back, ask questions, observe reactions.  Then go back and iterate and improve and expand the board audience. I don’t recommend showing up to the board meeting with a plan that nobody except the exec team has seen and expect there to be an easy discussion and approval process. Planning and plan approval is an important process and it deserves the proper care and feeding, so to speak.

Of course, the plan itself is a living document and not set in stone the moment it’s approved — something always changes either inside or outside the company and course corrections are required.  That said, you can’t factor surprises into a plan a priori so any plan assumes some degree of risk of major, company affecting surprises during the course of execution.  To accomodate these adjustments, quarterly board meetings regularly measure the company against its plan and allow for discussion and course correction.

Walking Through the Example Spreadsheet

In this section, I walk through the spreadsheet and other materials and explain how I’d look at past periods as well as the proposed 2011 plan.  I’ll also go through the supporting materials that I’d bring to the board discussion of the plan itself.

Part One:  Context of the past periods

Remember:  past operating history is important because previous operating trends (namely revenue and expense) are generally predictive of future operating trends.  And while you want actuals reported on using standard accounting practices (balance sheet, cash-flow statement, P&L statement), summarized information, as shown here, is typically a good starting point.

If you look at a snap shot of 2010, you’d see that cash, expense and revenue look like the chart here. NOTE:  Cash values are shown on the left Y-Axis and Expense & Revenue are shown on the right Y-Axis. The past period starts in January of 2010, so I’d say that this company probably raised about $1m around the end of 2009; they were doing about $20k in revenue in January 2010 and their expense rate was about $50k (remember – right axis for expense and revenue).  This company ends the year unprofitable with an expense rate and cash position that suggest that another financing is in the cards in the first 3 to 6 months of 2011, depending on how revenue ramps.

Throughout the year, cash declines smoothly but expense steps up in relatively sharp increments around March, June and November – what’s up with that?  If you look at the spreadsheet, the expense jumps correlate to increases in headcount – and that’s not surprising – most company’s dominant expense is people.

There is also an interesting spike in revenue in December 2010 – it would be interesting to hear the company’s explanation for why that was the case – was it seasonality?  was it expected or a surprise?  does it really ramp back down in January of 2011 or do we continue to ramp up?

Part Two:  The 2011 Plan Summary (version 1)

Now we add the 12 month, 2011 plan to the chart shown above.  The trend lines for cash, expense and revenue continue for another 12 months and we can see the cash line plunge through the X-Axis around June of 2011. Clearly, we’re not done with this plan as the company would be insolvent by mid-year…so we’ll have to factor in a financing AND ensure that the expense and revenue lines make sense relative to both running the business AND raising additional capital.

Continued HERE.