Annual business plan: from strategy to twelve months of action

In October, the owner of a landscaping firm is already thinking about spring. The crews are fully booked with maintenance work until Christmas, but garden construction picks up again in March, and decisions have to be made now: an extra crew or not, buy a new excavator or hire one, more maintenance contracts or more projects. Leave those choices until January and you are too late. That is why the annual business plan is made a few months before the new year starts.

A good annual plan, or annual operating plan as larger companies often call it, is not a thick document. It is a short set of agreements about what you will focus on this year and what you will not, with the figures attached. It forms the bridge between the strategic plan for the coming years and the work on Monday morning.

Annual plan, business plan, strategic plan and budget

In practice the terms get mixed up. Each has its own job.

The annual plan and the budget belong together. The plan says what you will do; the budget says what that will bring in and cost. Yet this is exactly where things often go wrong. According to Robert Kaplan, 60% of organisations do not link their strategic priorities to the budget (source: Harvard Business School, March 2006). The fine plans then sit in one document while the money follows another.

What goes into an annual business plan?

• Review: what went well, what did not, and why? With this year's figures set against the budget and against your sector.
• Direction: one or two sentences from the strategic plan, so everyone knows what the annual plan is contributing to.
• Annual goals: three to five SMART goals, financial and non-financial.
• Initiatives: the projects that bring the goals closer, each with an owner, a budget and milestones.
• What you will not do: the projects and customer groups you are deliberately leaving aside this year.
• Figures: a summary of the budget, the investments and the cash flow forecast.
• Rhythm and assumptions: when you will review progress, and which assumptions you will keep an eye on because the plan depends on them.

Making an annual plan in six steps

1. 01

   Look back with the figures

   Set the expected full-year figures against the budget and against last year. Compare margins and cost lines with the profit and cost benchmark for your sector. That shows which problems lie with you and which with the market.

2. 02

   Test the direction

   Do the choices in the strategic plan still hold? Are there customers, competitors or costs that change the picture? Work out a few scenarios if uncertainty is high.

3. 03

   Choose three to five annual goals

   Write them as SMART goals and give the people who have to achieve them a say in the target values. According to the research on goal setting, commitment to a goal is one of the conditions for reaching it.

4. 04

   Choose the initiatives and fund them

   Which projects really bring the goals closer? Give each one an owner, quarterly milestones and a budget of its own. Kaplan and Norton recommend funding strategic initiatives separately from running costs, so they do not fall victim to the first round of cuts.

5. 05

   Work through the numbers

   Translate goals and initiatives into a monthly budget and use a cash flow forecast to check that the cash will last the year. In the Business Planner you record the financial side and update it later on.

6. 06

   Fix the rhythm and tell the story

   Put the monthly and quarterly reviews in the diary before the year begins. Present the plan to the team: what we are going to do, why, and what we are leaving aside.

The one-page annual plan on an A3

An annual plan that fits on one sheet gets read. The A3 format comes from the lean tradition, where problems and plans are summarised on a single sheet of paper. A practical layout:

If you work with an OGSM, you can use it as your annual plan: the Goals become the annual goals and the Measures the initiatives and measurement points. See the OGSM model.

Worked example: a landscaping firm with 25 staff

The firm builds and maintains gardens and grounds for private clients and businesses. Construction work is growing, but project margins swing widely and crews stand idle in winter. Over the next three years the owner wants a larger share of revenue to come from fixed maintenance contracts with business clients. The annual plan translates that direction into the coming year.

Fictitious Firmfocus example.

What the firm will not do this year: open a new branch, or take on large private projects lasting more than three months. The account manager's salary is ring-fenced in the budget as a strategic item, so it is not cut if spring turns out disappointing. The cash flow forecast shows that the balance is lowest in February, so the excavator will be bought in April rather than January.

The annual plan through the year

An annual plan that is presented in January and evaluated in December steers nothing. In a McKinsey survey, more than a quarter of executives said their company had plans but no path to execute them (source: McKinsey, August 2007). And according to Michael Mankins, the top team of a typical company spends only three hours a month discussing strategy (source: Harvard Business Review, September 2004). A fixed rhythm keeps the annual plan from fading into the background.

• Every month: the figures against the budget in the management report, with the status of the initiatives.
• Every quarter: half a day for the annual goals. Are they on track, which milestone has been reached, what will we do next quarter? Update the forecast and shift resources where needed.
• Halfway through: test the main assumptions. If something fundamental has changed, adjust the plan rather than letting it quietly go out of date.
• In the final quarter: look back and draw up the new annual plan, as the next round of the PDCA cycle.

Methods such as Gino Wickman's EOS and Verne Harnish's Scaling Up put that quarterly rhythm at their core: each quarter the annual plan is turned into a few priorities with an owner, and a weekly meeting tracks progress. OKRs also run by the quarter.

Pitfalls

• A wish list: every department gets its own project in. The plan grows broad and nothing gets real priority.
• Goals without money: the plan and the budget are drawn up separately.
• Only financial goals: revenue and profit are outcomes. Include goals for customers, people and processes, because they determine the outcome.
• Starting too late: if you are still planning in January, you have already lost the first quarter.
• No review of last year: without looking back, you make the same mistakes in a new guise.

SMEs and large organisations

Choosing between initiatives is easier with someone to think it through with. The Firmfocus Advisor works through your goals and options with you, using your plan and the figures for your sector.

The annual plan is the starting point of the yearly round in planning and control. That overview also shows how budget, forecast and reporting fit together.