Avoid These Common Pitfalls For A Successful Annual Operating Plan
It is that time of year again. Summer is over and most FP&A departments are in full swing getting ready to close out the quarter and simultaneously prepare for the build out of the Annual Operating Plan.
In this post I offer some common pitfalls to avoid going into planning season.
- Bottoms Up of Tops Down – Solve the Chicken/Egg Problem First
Some of the most important participants in the Annual Operating Plan process, besides the CFO, are the leaders of a company’s business units. These are SVPs or VPs of a business unit, line of business or the leader of a group of business segments. The one complaint nearly all business unit leaders have is this:
WHY SHOULD I GO THROUGH THE PROCESS (AND USE UP VITAL DEPARTMENT RESOURCES) TO GO THROUGH A BOTTOMS UP BUILD OF A FINANCIAL PLAN IF IN THE END YOU ARE GOING TO GIVE ME A NUMBER AND TELL WHAT I NEED TO DELIVER IN TERMS OF TOP LINE, MARGIN AND OI FLOWTHROUGH?
My fellow FP&A professionals are chuckling right now because those of us who are seasoned have navigated this question on more than one occasion. Most often the response is crafted around the desire for the C-Suite to make sure they understand the details and can feed scenario models for more effective decision making. The truth is often that the leadership team wants to see, if left unchecked, what could the businesses deliver and what that looks like on a consolidated basis. The result is never extraordinary top line growth and lower expenses.
Each organization operates within a set of boundaries such as lead analyst expectations (for publicly traded companies), 3 statement models developed by investors or a set of financial objectives laid out by the C-Suite. Regardless of the bumpers a company has, the important part is the communication around these topics.
Therefore, establishing “the why” during any planning season kick off is important for the whole leadership team and paves a much smoother path for any FP&A team.
2. Alignment on Initiatives/Investments
Before any work is done in terms of schedules, meetings, expense reviews and model builds, all organizations ideally have a set of strategic initiatives that are either serving or accomplishing in the coming 12 months. When these are clearly understood by the C-Suite and business unit leaders, annual operating plan development automatically has a set of boundaries. Having those boundaries sets an effective framework for the way forward.
Lack of clarity on strategic initiatives leaves the leadership teams and those developing plans with a blank sheet of paper. Like an architectural build without any general scaffolding, planning efforts quickly fall into disarray without internal alignment on objectives. As plans roll up department by department they should each sit in the context of key objectives and investments for the coming year. This allows everyone to sing from the same song sheet and avoids large exercises in plan development that are ultimately discarded.
3. Make a plan for the plan
Making a plan for the plan is the easiest part of any planning process but is the most often overlooked. Beginning with the end in mind, teams target a board meeting where the annual operating plan is approved. FP&A leaders must work backward from a “pencils down” date in order to get the organization to work in harmony for the deliverable.
What on its face appears to be a simple calendaring exercise is often quite challenging. Aside from all of the system level preparatory work that FP&A teams need to do, there is highly customized prep work that has to be done in order for FP&A to talk to departments across the organization. This is a combination of pulling and presenting historical information along with a general understanding of the strategic objectives of the business unit.
When engaging with leadership what ultimately tends to be the wrench in the process is travel, conferences, PTO and customer meetings. Capturing the attention of key stakeholders across the organization by getting on their calendar and having them understand the overall objective is a crucial aspect of the process.
A common mistake is not getting ahead of this calendaring and not building in enough time for missed deadlines, schedule changes, new information and system problems. There is an amount of cushion that each organization must have in its planning process in order to land the plan om time.
4. Dependencies
Making a plan for the plan also includes understanding the internal dependencies and including the inclusion of those into the schedule.
The prime example of this is commission planning. Any revenue model requires an understanding of how sales are going to be achieved – everything flows from this point. This is why the FP&A partnership with sales leadership is so crucial. Sales targets and commission plans require a great deal of time to develop especially in large organizations. Nailing down this dependency too early (not enough information) or too late (after the vision for the top line is decided) can derail the whole annual operating plan process.
5. Understanding Headcount
Headcount is central to all operating plans.
Where organizations face challenges is keeping track of headcount. On its face, headcount should be an easy exercise. In all most all companies, headcount is actually quite challenging. The reason is because the systems around headcount management are lacking in the presence of fixed position numbers and titles. Without them and inside a fast-moving organization, people and open positions move around quickly and from department to department – think of three-way trades in the NHL (a three-way trade in the NHL involves three teams exchanging players, draft picks, or other assets in a single coordinated transaction, often designed to address salary cap, roster needs, or contract limitations).
If you are moving names around an organization or the term “open position” around an organization, whenever there are changes to the name or the location of the open position(s) you quickly lose sight of what your planned expense basis was going to be for the annual operating plan. Position numbers with fixed titles help to keep sight of what the planned investment was even when there is turnover or a departmental transfer.
6. What Did You Say Before?
Long range business plans typically cover a 3-5 year time span. When done well, year two of that plan should become the starting point for the next years’ annual operating plan.
The only constant of course is change, and that starting point will be affected by the actual results in year one. Boards of Directors understand this reality. What is key for leadership teams presenting a new operating plan to the board is to address changes from the last time the story of the business was shared. This usually involves an understanding of the drivers of missing an EBITDA or Net Income target through an analysis of variances to top line and operating expenses along with any unusual events.
Not having a bridging exercise completed prior to any conversation with the board can impact the C-Suites credibility.
Are you looking for leadership in your FP&A organization or an extra set of hands to achieve your plan on time and strongly built out? Feel free to contact me
#AOP #Budgeting #AnuualOperatingPlan #Strategy #2026
