How CFOs Can Turn Their Strategic Vision into an Annual Operating Plan

As you prepare for an exit, it’s critical for CFOs to build annual plans that reflect the company’s broader, long-term vision. To achieve this, CFOs must lead cross-functional teams to integrate product and go-to-market strategies with near-term financial objectives. 

In a survey of executives in the CFO|Circle, 52% of respondents said they have established or are currently implementing a strategic multi-year plan, while 48% said their multi-year plan is in year one or does not yet exist. 

By establishing a multi-year financial roadmap that aligns with your strategic vision, you will prepare your organization to mature and adapt to the ever-changing economic environment. As we’ve noted, there is both an art and a science to getting annual planning right.

In a conversation with The Circle, Greg Henry, CFO at Couchbase; Stewart Ellis, CFO at Hippo Insurance; and Susanna Morgan, board member at Payoneer and Mixpanel, discussed how to strengthen the planning process, reconcile the tension between strategic vision and annual budgeting, adapt the plan in the face of changing market conditions, and meet board member expectations around planning and forecasting.

1. Develop the Right Planning “Triangle” Framework  

The annual plan is part of the planning “triangle” that ties together a company’s vision, a strategic multi-year plan (including go-to-market, product, and financial objectives), and its near-term annual plan. It is imperative to include the strategic multi-year plan in the annual planning process so your company can best allocate its resources across the mid- and long-term. Alignment of these two critical perspectives will also help to avoid mistakes that arise when the two are not aligned.

Stewart approaches this process as if he were to write his next four shareholder letters today, asking, What will the company want to say about its performance over the next four years? 

“After many years of leading the planning process, I realized that annual planning is not a forecasting exercise. It is a prioritization exercise with the goal of aligning internal resources against the top drivers of value for the company.” –Stewart Ellis, CFO at Hippo Insurance

While the long-term plan is a helpful compass for planning one year at a time, neither are ever written in stone. The VIPs recommended sharing an updated multi-year plan with the executive team every six to 12 months to show what has changed in terms of overachievement and underachievement. Greg compares underachievement to a cue ball on a pool table. “If you are off by a millimeter when you hit the ball, you’ll likely be off by inches by the time the cue ball reaches the other end of the table,” said Greg. “Even minor underachievements can create wide financial gaps.” 

2. Reconcile Tension between the Strategic Vision, Multi-year Plans, and Annual Budgeting

While the goal is to align multi-year and single-year plans, there are times when a company’s long-term goals are in conflict with its annual budget. In some cases, a company might have great strategic vision, but no multi-year financial plan to bring it to fruition. 

When Remitly was a private company, it had a goal to become the largest remittance company in the world. The annual plan was consistent with that goal and supported its growth focus. Because the team was making considerable investments for growth, it took several years for the company to become profitable. When Remitly developed its IPO readiness plan, it knew it had to outline its path to profitability. That led to tension. 

At the time, investors were rewarding growth and there was a concern that near-term efficiency might sacrifice long-term revenue growth. “The strategy and the annual plan were growth-focused, and that wasn’t consistent with the multi-year financial plan,” said Susanna. “We wanted to be profitable, but we didn’t have the discipline in the short term.”

To hold different teams accountable, Susanna and the executive team took a hard look at expenses, including R&D, which is difficult to manage when the returns can take years. They ultimately cut back on a product that they had invested in for years because it hadn’t generated the expected usage. One lesson learned was to be very clear upfront on the leading metrics that indicate when to double down or cut back. This makes explaining the “why” with the greater team easier and helps those across the company understand any changes. 

“Always have a framework or process to help people understand why you’re making budget trade-offs. Some resources to use for this include benchmarks of comparable companies, expense ratios and trends compared to your target financial model, ROI estimates for big investments, and linking discretionary spending to the company’s top priorities.” –Susanna Morgan, Board Member at Payoneer and Mixpanel

3. Make Sure Executives Partner Together and Present as a Unit

Developing an annual plan is a team process. At Couchbase, they used to have the different department leaders pull together their own plans, and then share them together at an executive off-site. But that often resulted in business units working in their own silos and the plans weren’t always connected. “You’ve got to create that interlock so the different teams present as a unit,” said Greg.

As a result, they changed the planning process and had the CRO, CMO, and partner leader develop their go-to-market plan together. Then they had the CTO and CPO work on their product plan together. 

“Once we started developing cross-functional GTM and Product plans, the teams were able to create higher-level roadmaps and budgets, allowing them to optimize at the company-wide level, rather than everyone working in their own lanes.” –Greg Henry, CFO at Couchbase

To put its money where its mouth was, Couchbase also changed its executive compensation. They moved from using an individual factor to putting all executives on the same plan. This consistent approach further incentivizes the team’s collective performance and ensures everyone aligns around the same objectives.

4. Adapt the Plan in the Face of Changing Market Conditions

As a newly public company in 2021, Hippo experienced a variation of a story many private, fast-growing companies did when the market context changed. Interest rates, which had been close to zero, went up substantially. And the cost of reinsurance capital went up, especially in the areas more prone to catastrophic risk access to capital. Money dried up. 

Hippo had fortunately raised money before this, but the company needed to retool its business in a public setting. “In this new state of the world, many of the things that we had in our short-term plan were going to be distractions or even negatives to achieving our multi-year plan,” said Stewart. 

Stewart told the founder that what they had optimized against needed to shift. “It was a labor-intensive process and required an enormous amount of trust between the CFO and the CEO or the founder. If you have that level of trust, you can have the biggest impact on the company’s potential success of anyone at any point in the company. If you don’t, it’s a challenge.”

To implement this, Stewart and the team drew a clear line between the core drivers of value at the company and what it took to be successful as a business. They reorganized the company and changed where in the product value chain they wanted to be, so they could hit their financial goals.

“Fundamentally changing the priorities of a business midstream is probably one of the hardest things that any CFO will have to do. CFOs of less mature companies should have this skill as part of their toolkit because this experience is likely to happen at some point in your career.” –Stewart Ellis, CFO at Hippo Insurance

5. Meet Board Members’ Expectations When Presenting the Plan

As CFOs seek to manage board expectations during planning season, current board members in The Circle shared the following questions that are always on their minds: 

• Does your financial plan and roadmap go out at least 12 months in detail? And then does it show where the company is going in years two and three, even if it doesn’t have the same level of detail? This shows the board long-term thinking, especially in areas such as product/market fit. If the product fits the market, and the total addressable market makes sense, the board will also want to see if you have the right people to drive this growth.
• How bought into this plan is the whole management team, from the CEO to the head of product and head of sales? This shows both a reflection of how hard the CFO tried to get alignment and how accountable everyone else will hold themselves to the plan.
• Do you have trends to back up what you are sharing? One board member said they feel frustrated whenever they are presented with trend information that is not backed up with data or shown in context.

By preparing for these topics in advance of your board conversations and avoiding surprises, you will be well-prepared to address their top questions about your company’s future plans.

The Takeaway:

The multi-year financial plan is a tool to shine the spotlight on areas where your company’s strategic vision and annual plans are aligned – or at odds. (If it is the latter, you can use it to drive change in your organization.) To create a strong multi-year plan, have your department leaders partner on their parts of the roadmap, assess it every six to 12 months based on the company’s growth and market conditions, and show your board that the entire leadership team is committed to achieving it. This will allow your company to have a long-term focus, mid-term accountability, and near-term adaptability.

Apply to join The Circle to participate in conversations like this one within a private leadership community of CXOs.