The SaaS annual operating plan (AOP) vs budget: Aren't they the same thing?

Annual operating plan (AOP) and budget are words that are often used interchangeably. However, they are very different things.

To understand the difference between AOP and budget for SaaS companies, it helps to start with a 30,000-foot view. SaaS companies are unique given their pricing models and dynamic buying cycles. Growth is a paramount concern, particularly for startups, which is why they need to remain laser-focused on achieving important milestones.

These goals might include hitting a revenue target, achieving better operational efficiency, or reaching strategic milestones. Usually, it’s a combination of goals that together will help a SaaS company grow.  

This is where AOP and budget come in. SaaS companies need an AOP to give them direction. And they need a budget to drive them forward to meet the goals identified in the AOP.

Both activities are planning activities that go hand-in-hand to help a company meet its business objectives. Let’s take a closer look at what goes into each type of planning document.  

Key differences between an AOP and a budget in SaaS

Before diving into the details of each type of planning, let's first set the table with a high-level overview of the differences between an AOP and a budget.

What is an annual operating plan in SaaS?

An annual operating plan is an high-level plan that helps a SaaS business achieve its goals. An effective annual operating plan will include key performance indicators (KPIs) for individuals, teams, an annual budget for each team, and timelines, and customized action plans and strategies to hit the defined targets.

A well-conceived annual operation plan provides a roadmap that provides the necessary direction and enables better decision-making by individuals/teams. With an AOP, they know what is exactly expected from them, both in the short term and the long term.

Key components your annual operating plan should include

A comprehensive annual operating plan will contain the following components:

• Clear goals and objectives – The key to a good AOP is setting goals that are SMART--specific, measurable, achievable, relevant and time-bound. While the big directional aspects have to come from the leadership team, the nitty-gritty of breaking the AOP down quarter by quarter, assigning the right individuals to tasks, measuring the KPIs, is the responsibility of team leads/managers.
• Key performance indicators – With the goals in place, the next step is to identify the KPIs, aka relevant data points, to monitor progress towards each company goal. Whatever metrics you choose, they should ideally be measurable with data that the organization already collects. However, if the goal is something new, you’ll need to find a way (like acquiring relevant technology) to objectively measure your progress toward the goal. For example, if increasing customer lifetime value (LTV) by X% is the goal, the relevant KPIs to track would be churn rate and average contract value (ACV) as each has a direct impact on LTV.  
• Roles and responsibilities – Each team and individual must know what their role is in implementing the plan. This clarity will enable them to meet their individual goals and help ensure that their combined efforts will lead to achieving the goals of the AOP.
• Execution timeline – The AOP must include realistic timeline targets for different tasks. It’s best to split the AOP into smaller weekly, monthly, and quarterly milestones to ensure consistent, stepwise progress toward each goal. These milestones provide the opportunity to take regular stock of the progress and also help in course correction if necessary.
• The right budget – While strategizing on the AOP is one part of the exercise, it’s critical to develop a budget for each team to ensure they can fully execute on the goals that will move the needle for the company. To achieve company goals, leadership must weigh the requests from all the individual teams along with the company-wide expectations to ensure the right allocations. While these decisions rest with leaders, it’s important to involve key stakeholders in the process to help them understand the decisions made.      

Now to answer the question, what is a budget?

Let’s imagine that your company is looking to increase its annual recurring revenue (ARR) by 100%. Assuming it is an early-stage startup, you’d need to subscribe to the right software tools for various sales and marketing activities, increase your headcount, possibly do some upskilling of existing staff, as well as some other things. So, where do you get the money for this? How much will you allocate to each type of expense?

Answering these kinds of questions is what a budget does.  

The fiscal year budget is a plan that outlines the financial resources of the company and allocates to each team the necessary resources to achieve their goals in the upcoming year. Simply put, a budget tells you how much money is going to whom and for what purpose. Without the budget, operational planning is just a paper exercise.

How and whether to merge AOPs across different departments

Creating an annual operating plan may seem pretty straightforward once you know what goes into one. However, the reality is often different. In many companies, chaos is the name of the game during the annual planning months because every team comes with its own priorities and viewpoints.

The simple truth is, various teams with different budgets and assumptions always results in different plans. And, this often translates into a lot of disagreement (i.e. chaos).

The problem is that there's often no single source of truth when it comes to the data that’s required for the budgeting process. The sales team uses its own data source(s) to track metrics, while the marketing, engineering and product teams do the same. This results in different numbers for the same metric, leading to decision-making paralysis.

Each team comes to the discussion table with its own source of “truth”, all vying for a bigger budget, which results in a painful AOP process that makes it hard to achieve true alignment.

While alignment may not be difficult for smaller teams to achieve as consensus can often be reached in a few meetings. However, in larger organizations, it can be harder to reach an agreement simply due to the number of teams and other stakeholders involved. In many cases, larger teams have processes in place to align plans, but the process is still inherently challenging.  

Another layer of complexity that creeps in with larger organizations is alignment between symbiotic and non-symbiotic teams.

For example, headcount planning and the product development team may be working from very different assumptions and as a result, their planning and spending might be different.

In contrast, symbiotic teams (e.g. different teams within RevOps) likely wouldn't have that problem because they’re already working together closely. As such, they would see very quickly where a misalignment is causing problems.

How do you create an AOP and a budget that work together?

Your AOP and budget go hand-in-hand and have to work well together in order to help you move the needle for your business. While this isn't always easy, there are a few best practices you can use to create a solid plan with the right funding allocations to successfully implement it.    

Combine the individual AOPs and budgets for each team into one

Each team comes with what it believes will be an effective plan for the upcoming year along with a budget request to make implement it. Each plan must then be evaluated and ultimately folded into the company-wide AOP and budget.  

The leadership must weigh the pros and cons while allocating the budget while keeping the strategic targets in mind. They’re looking at questions such as why one team should get more resources than another, whether this or that expense is justified, and whether there’s data to support a given request.

The goal of course, is to correctly allocate the necessary resources to each team.  To answer these questions and make well-informed decisions, the CFO and department heads must work together to help ensure tight alignment of AOP and budget.

Budget from bottom to top and create your AOP from the top down  

When it comes to the flow of information, budget and AOP are opposites in the sense that budgets are developed from the bottom up and AOPs are developed from the top down.

Each team creates a plan that to include specific strategies and activities necessary to reach their targets and a corresponding budget request. Then the leadership works with the finance department to either approve the request or revisit it with the team.

Using a top-down approach to budgeting risks ill-informed decisions and as a result, likely would produce the desired results. A bottom up approach allows the opportunity to analyze expenses at the team level. This analysis will help find opportunities for adjustments if needed.

In contrast, an AOP must flow from the top because leadership has a unique vantage point. They’re looking at the overall landscape of the business to determine what each team needs to accomplish for the upcoming year. With direction from the top, teams are better able to develop individual plans that together will help the company achieve its overarching goals.  

Work to achieve alignment horizontally and vertically

Often there are silos that exist both vertically, between different organizational levels within the company, and horizontally, across different teams.  

These silos usually become very apparent during the annual planning process simply due to the nature of the exercise.

While it can be a difficult task, for an AOP to be effective, companies must ensure both horizontal and vertical alignment. Horizontal alignment means that all the different teams within the company must be on the same page, with individual AOPs and budgets that work well together.

Likewise, those plans must also be aligned vertically, ensuring that they are consistent with the strategic plan developed by the company’s leadership.  

Bring data to the center of your decision-making

In most cases, different teams within the company use different tools and systems for their day-to-day work, which leads to disparate and siloed data. This makes it harder to trust the data when developing budgets and targets for the AOP.

Leaders should, ideally, have all the necessary data in a single place so they can be confident that everyone is working off the same numbers in making their assumptions and projections.  An AOP and budget with resource allocations based on well-informed, data-driven decisions will result in a solid annual operating plan, significantly increasing the likelihood that the company will achieve its goals.  

Make sure everyone is on the same page

Decision-makers must communicate the AOP and the budget to their different departmental teams and to external stakeholders to provide the necessary clarity and helps avoid potential clashes.

In some cases, however, it’s good to have two versions of the AOP and budget as the investors’ view may or may not line up with the internal model.  Your investors may expect your plan to be more conservative. However, if your goal is to not only meet but beat your targets, having a second, internal version of the plan that’s more aggressive may make sense.  

How do you solve the ‘data problem' to create an effective annual operating plan?

While budget and AOP are separate exercises, they need to work in tandem for companies to hit their goals. For large organizations, these processes can feel like a mammoth undertaking and one that promises many contentious meetings in order to achieve alignment.

Drivetrain can help. Using a strategic finance solution, purpose-built for SaaS strategic financial planning and analysis (FP&A), you can make faster, data-driven decisions with confidence.

Drivetrain aggregates data from all your different source systems so when you begin your AOP and budget discussions, everyone is working from the same data – a single source of truth – right from the start.  Teams can also do scenario modeling to see how varying the budgets for different teams can affect the AOP’s success. And, as you begin implementing your AOP, you can easily measure your progress at any point along the way to quickly make any adjustments needed to stay on track to your goals.