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How to avoid the pitfalls to create an effective annual operating plan

The challenges in creating a strategic annual operating plan (AOP) can be like speed bumps for a CFO. Here’s how to get over them without slowing down.
Kirk Kapplehoff
August 9, 2023
8 min
Table of contents
What is an AOP in finance?
The 5 biggest challenges in creating an annual operating plan
Best practices for developing a solid annual operating plan
A CFO has to wear multiple hats 
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Creating an annual operating plan (AOP) can be a difficult road for CFOs in SaaS companies to navigate. Finding the right balance between future innovation, scalability, and customer success can be especially tough. This article will discuss the biggest challenges you can expect to encounter in your planning process and give you some best practices that will help you avoid them.

Developing an annual operating plan (AOP) is often an arduous process wrought with many different challenges, such as the lack of accurate data, resource constraints, unrealistic goals/expectations, and difficulties in getting the cross-functional collaboration necessary to achieve strategic alignment on the final plan. 

These challenges are not insurmountable, though, and in this article, we’ll help you understand them better so you can meet them head-on.  But first, let's briefly

What is an AOP in finance?

At a high level, the AOP serves as a strategic business and financial plan that answers the 5Ws+1H (what, who, where, when, why and how) for a SaaS company to achieve its business growth objectives.

As the name suggests, it is developed annually by translating the company's high-level strategies (e.g. those in the company's three- or five-year plan) into actionable operational plans to guide the company's activities for the next 12 months.

The 5 biggest challenges in creating an annual operating plan (AOP)

1. Lack of accurate data and information

Quite often, different teams in a SaaS company function as independent entities, each with their own data source(s), key performance indicators (KPIs), and different ways of thinking about the process. While the CFO can help clarify any questions regarding the budget vs AOP process, the more challenging piece is the difference in KPIs. This is because for any given metric, different teams are likely using different data to calculate it. Of course, each team will claim that theirs is accurate, which leads to disagreement and makes it difficult to write an annual plan aligned to the strategic goals of the company. 

CFOs tackle such situations in one of these two ways:

  1. They can manually integrate multiple data sources to derive the required metrics and decide which data to use to calculate the necessary metrics. Of course, this isn’t easy as there are often several data sources they’ll need to pull together. Depending on the size of the company, these might include an  ERP, a CRM and other systems that support sales and marketing activities, an HR portal and an accounting system. 
  2. They can use a purpose-built financial planning and analysis (FP&A) tool to streamline the data into one centralized platform to provide a single source of truth for the company.

2. Limited resources and financial constraints

CFOs are always battling the funding crunch and budget limitations. However, they’re tasked with finding creative solutions, ideally informed with the right data, to ensure there are enough resources to develop an AOP that can be successfully implemented to grow the business. 

Here are a few ways you can optimize your resources to allocate them:

  • Solve for high-impact initiatives: CFOs that are able to identify the  issues and initiatives impacting the business can prioritize resource allocations towards those activities that will drive the most growth and customer satisfaction. 
  • Identify areas of cost optimization: A few areas that CFOs can focus on include re-negotiating vendor contracts, finding cheaper but effective alternatives for money-guzzling IT tools, streamlining the company’s use of SaaS tools to avoid buying multiple tools for same/similar use cases. They can also evaluate the use of  full-stack solutions that can cover multiple use-cases to replace  multiple single use-case solutions. 
  • Keep customer success as the north star: Any initiative that helps to achieve better customer success should get high priority in the annual plan and budget. Zeroing in on these initiatives increases customer satisfaction and reduces churn. This approach can also lead to better word-of-mouth customer advocacy for your product, which can ultimately reduce the amount you have to spend on marketing to acquire new customers.    
  • Support strategic talent acquisition: CFOs can also work closely with HR and department heads to understand key talent gaps and ensure that there are enough resources to hire good talent and also for upskilling initiatives, both of which can positively impact growth.  

3. Difficulty in setting realistic targets and goals

To develop an annual operating plan, CFOs must strike a balance between what each team wants to achieve and the realities of the available resources.  This can be especially difficult with limited resources and conflicting stakeholder expectations. And of course, there are also ever-evolving market conditions to consider. Techniques CFOs can use to set realistic goals in the annual operations plan include: 

  • Setting SMART goals: The best goals for any plan are SMART goals, meaning they are goals that are specific, measurable, achievable, relevant and time-bound.
  • Benchmarking: Comparing your company’s metrics and overall performance against peers and market leaders is a powerful way to not only to come up with numbers that are achievable but also to almost magically create alignment around the yearly operating plan. 
  • Developing multiple scenarios: CFOs must analyze different scenarios to come up with best-case, most-likely, least-likely, and worst-case scenarios. Scenario modeling takes into account potential risks and changes in market trends in the upcoming year that could impact the business.   
  • Use rolling forecast: In addition to creating a plan for the entire year ahead, it can help to develop plans for shorter periods as well, that run say, quarter by quarter (call them QOPs if you like). This allows the company greater flexibility to experiment and iterate along the way. 

4. Lack of cross-functional collaboration

Ensuring horizontal alignment between managers and top leaders and vertical alignment between different teams is paramount for CFOs during planning. Failing to align in either or both directions can result in a plan with poorly informed decisions based on insufficient or incorrect data, misaligned business goals and objectives, and duplication of effort. 

CFOs need to communicate openly with all teams to establish realistic objectives for each and avoid potential clashes. Having  a single source of truth when it comes to data can provide a starting point for the planning exercise and make cross-functional  collaboration much easier. 

In many ways, the CFO is like the conductor of an orchestra, ensuring that every team hits the right notes for a well-thought out, effective AOP.  

5.  Achieving alignment with strategic objectives

In today’s SaaS companies, the CFO is no longer limited to a strictly finance-centric role. The modern CFO is now a strategic advisor providing an important bridge between the leadership and the different teams involved in the planning process. On one side, they view things from a leader’s vantage point while on the other, they understand the ground realities and day-to-day activities of each team. 

Integrating these two views during the planning process to ensure alignment of the operational plan with the objectives in the strategic plan is one of the most important duties of a CFO. Doing so ensures better budgeting, clarity on individual roles and direction, better resource allocation, more granular tracking of progress, and higher confidence in the annual plan.

Best practices for developing a solid annual operating plan

While there's plenty of challenges inherent in developing an annual operating plan, there are also a few best practices that if followed, can make the process a whole lot easier.

Leverage advanced technology

The right planning software can go a long way in tackling the challenges mentioned above. CFOs can plan, monitor and course correct quickly if they have access to their actuals in real time. Using a tool with the ability to integrate the data from multiple sources within a company provides a single source of truth to support the planning effort and track the company’s progress throughout its implementation. The best tools will also provide predictive alerts of any potential deviations. 

CFOs should also be able to easily create best-case, worst-case, base case, and what-if scenarios to help them make better decisions faster. With a tool that can continuously monitor performance, the company can identify bottlenecks and resolve them quickly.     

Adopt a continuous improvement mindset

As a function of their role as leaders working with all the teams within the company to develop the annual operating plan, CFOs are in a good position to foster  a ‘continuous improvement’ mindset. Rolling forecasts provide a great way to do this because they not only build agility into an otherwise rigid plan but also encourage teams to   regularly review their performance, ideally on a quarterly basis, and make any adjustments they need to help them not only meet but beat their targets before the end of the year. 

Encourage collaboration and communication

As the business leader for the planning process, CFOs should do their best to encourage open communication and collaboration. Ideally, this kind of a culture would already exist within the organization. But if it doesn’t, to the  extent that CFOs can help build one,  creating an AOP will be much easier.  

Plan from the top down, budget from the bottom up (and let data drive all your decisions) 

An annual operating plan must flow from the C-suite in order to be successful. This is because company leaders have a unique, high-level view of what the business needs to achieve in the coming year. 

CFO’s should start the process of annual planning by first consulting with their fellow executives to establish the overarching goals the annual operating plan must support. The CFO can then work with individual teams to figure out the nitty-gritty details of the plan and how those goals can best be achieved. 

When CFOs develop their budget for the AOP, it’s better to start from the bottom up. This is because allocating resources effectively depends on first having clarity on the activities each team is planning to help them meet their individual goals and the resources each will  require. 

Developing a budget invariably requires CFOs to make some tough decisions. However, to the extent that they’re able to bring data to the center of their decision making, it becomes easier for everyone to accept the final budget.  

A CFO has to wear multiple hats 

Developing the annual plan is arguably one of the most important tasks of any SaaS CFO today. In many ways, the CFO is like the conductor of an orchestra, ensuring that every team hits the right notes for a well-thought out, effective AOP.    

A CFO is a strategist and a mediator, often dealing with everything from a lack of critical data for planning, budget and resource constraints, and collaboration nightmares. 

By using best practices along with good strategies, the right technology, and a little creativity, CFOs can overcome all of these challenges to develop an AOP that can drive the company’s forward momentum to help it reach its strategic goals.  

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