15 Minute Founder E5: How to navigate annual planning

Join Alex Levin and Rebecca Green, co-founders of Regal.io, as they share their expertise on annual planning, providing valuable insights for both seasoned entrepreneurs and those embarking on the startup journey.

Key Takeaways

1. Strategic Planning Timing:
   • Allocate intentional time for annual planning, adjusting the start date based on the company's size, ensuring a purposeful balance between thoroughness and efficiency.
2. Balancing Confidence Levels:
   • Venture-funded startups must carefully balance internal team goals with board presentations, considering the level of confidence required for both plans to guide strategic decisions effectively.
3. Precision in Revenue Assumptions:
   • Prioritize clarity in revenue assumptions by dissecting major underlying factors, recognizing that early-stage accuracy may vary and adjusting plans accordingly.
4. Cost Side Control and Conservatism:
   • Exercise greater control over the cost side of the model, being conservative in planning, and employing benchmarks to inform decisions around ratios and burn rates.
5. Reforecasting for Agility:
   • Embrace reforecasting as a dynamic tool for managing cash effectively, ensuring a quarterly or half-yearly review to adapt strategies promptly and maintain financial agility.

Transcript

Alex Levin: 0:00

Happy new year. This is Alex Levin and Rebecca Green. We are co founders of Regal.io. And this is 15 minute founder. So as we're just starting the new year, we thought that we'd talk about annual planning. I hope by now, most of you have gone through this process and this will be in preparation for next year. But you never know. There may be still some stragglers getting it done. Both of us have actually been at huge companies, huge public companies. Rebecca was at Amazon. I was at Thomson Reuters with, you know, tens of thousands, hundreds of thousands of employees. And then, you know, the last startup we were at went from zero revenue, basically, to a billion and a half. So we saw what that process looks like. And now obviously we're at a early stage SaaS company. So we've seen what it looks like at different stages. And I, you know, I'd say the first thing is decide what it is that you want to do with your planning process. The, the thing I always remember is however much time you leave for a project, well, you'll end up taking that much time. So. You know, when we were, you know, Thompson word is we started in June or July, and that's how it worked when we were billion dollar in revenue public company, we started in September. Well, you know, when we're this size, we don't start till November and that's intentional because otherwise it would take all the time in the world. But, you know, as you think about, you know, our planning process, you know, what are the other sort of questions people should be asking themselves, you know, about planning as they're starting to go into it.

Rebecca Greene: 1:19

I think as a venture funded startup, a couple of things to think about are one is what, what is the plan for the internal team that your internal team is going to be stretched to hit and drive their goals versus what is the plan that you show to the board? And I think a related point is about what level of confidence you want to have in each of those plans and what the kind of job is for each of those plans to do. That's one, I think another one to think about is. In terms of getting to a level of confidence that you feel comfortable with, are you going to be thinking about a bottoms up plan? Do you have so few customers or so few, you know, selling agents that you think about building literally bottoms up or do you think top down? Right? And kind of marry those 2 approaches. Those are 2 things we like to think about.

Alex Levin: 2:06

Yeah. And you know also as founders, you know, how much do you dictate, you know, we need to, as a company hit this top line and this bottom line versus how much do you look at the reality of what the bottoms up plan is? And decide to be influenced by that reality, let's say instead of just sticking to your numbers. I think that's a very hard, you know, decision to make very early. So, so, you know, I'll start sort of with our process. You know, when you're a relatively early stage, you're not going to be that accurate. So just be aware of the fact that you're going to be wrong. And if you need to hit the number because you're going to show it to somebody, make sure that you take a discount on the number that you're using because you know you're not accurate. Maybe even look at different sorts of revenue that you have and look at the accuracy of the different types of revenue, right? Something that's committed revenue might be higher accuracy and something that's transactional revenue might be lower. When we were in a consumer business, honestly, it was hard to know what the consumer is going to do the next month. You know, when you're in a SaaS business, it's much more predictable. So it depends the type of business for how accurate you think the revenue is going to be. And then, you know, also make a decision of you know when you're looking at it you know, split out the most important sort of knowable ones. So usually that's your biggest customers or a couple of different segments, or maybe certain projects that are going on, you know, don't just lump it all together in one revenue number and make it really clear, at least in your thinking and hopefully in the model, what are the major assumptions that you're tweaking to get to the number. So if you're saying, Hey, on these 10 named accounts, here's what's happening, you know, exactly. On the rest, well, we're going to increase our cross sell rate from, you know, one new project a month to four new projects a month. Well, now if that's going to be what's in your model, you can give that to your team. So I think the more clarity you can have on the assumptions underlying what's driving the revenue, the better it'll be because you'll know what you have to do. And if you're missing that, you know, you're going to miss your plan. So I guess as you start thinking about that, you know, usually you typically shift to building a cost side of the model. I mean, how have you thought about this? Like as you've gone and built budgets in the past, Rebecca.

Rebecca Greene: 4:20

You're always more accurate on the cost side and you have much more control over that. So again, I think it's important to be more conservative on the revenue side and not just drive all your costs off of revenue assumptions. And be focused also on the time, the timing of that, right? If your costs are based off of revenue and you start missing on revenue or start getting higher on revenue, you want to make sure to, to focus on, okay, how fast can I actually move on my costs, either like upward or downward? So being more conservative around that there's certain ratios or benchmarks you can look at. Certainly you don't have to make everything up from scratch in terms of, for example. You know, how much revenue per employee at a particular stage that you're at, should you be targeting or the ratio of engineers to, you know, sales and marketing expense? And then from engineers, you get product managers, you get designers. So you can use some of those kind of heuristics or benchmarks from studies out there or VCs have

Alex Levin: 5:12

Yeah, and you don't have to go ask for these, so Bessemer and Iconic both have really good data that they publish for anybody to look at what average or what a top decile company is on each of these throughout their life cycle as they grow. So you can get some idea. I mean, one of the questions I love asking people the first time, you know, they're going to be taking over a P& L is. You know, how many people do you need? Or how many engineers do you need? And they have a really hard time at the beginning, but I think start with some just gross benchmarking. You know that. Best, best big public SAS companies might have a million dollars of revenue or 2 million revenue per employee when you're an early stage company, maybe you only have a few hundred thousand dollars of revenue per employee, but that's sort of an outside benchmark. And then to Rebecca's point, you can use these VC benchmarks to understand, you know, if you have a million dollars of monthly revenue, what percentage of that should be spent on sales and marketing, what percentage of that should be spent on. R and D on average, of course, like every business is different. So there may be reasons why you're doing it differently, but at least it'll give you some guidance. And then I think there's, you know, in the market and expectation on burn rate. So as you start looking at your. Revenue and your cost. So you have a bird and, you know, typically, you know, these days people are expecting under two times burn multiple, meaning if you're going to increase your revenue run rate or your AR in a year by 10 million, you can burn up to 20 million in that year. You know, there was a period a year or two ago where people were burning three or five times. And that was accepted, you know, there are some companies that don't want to be VC backed that don't want to burn any money, right? They want to stay very close to zero or, you know, negative burn so that they're actually making money. So I think, you know, deciding what the burn expectation is, is one of the most important things as a founder you can do. And, you know, deciding then sort of if your bottoms up gives you a certain number, how much you want to push your team beyond that. And typically that means going to your team and saying, Hey, you've put together a plan that. It looks like X, you know, what investment would you need, you know, what, what additional people or product or other costs, you know, do you need to get X incremental revenue and, you know, decide how much of that sort of extra project you're going to put in the plan. You know, when you're thinking about these new projects, I guess, Rebecca, like, how do you like to think about it? Do you put in a million new projects or very few or big ones, small ones? Like, how do you do it?

Rebecca Greene: 7:36

Yeah, I think it depends for me on the maturity of the business overall, and then the maturity of. The specific organization or department that you're thinking about these improvements. If it's a scaled department, you have lots of customers, lots of CS. People, let's say, then I think more about incremental improvements and how do we get, you know, 100 of our CS or support members to just be slightly better on their answer rates or slightly better on their renewal rates or things like that. I think it's easier to think in incremental, even if you end up doing bigger projects to try to move those and they don't all work. I think when it's a more nascent company or. More nascent organization where there should be much more opportunity to think big and take big swings. I think then you want to bet on some of the big swings and I think it becomes really hard with so few people to focus on, you know, 100 little optimizations. And I think you end up missing bigger when you do that.

Alex Levin: 8:29

Yeah, I also like pushing teams basically to say you should have a few big swings where, you know, it's high risk, but high reward. And, you know, a number of smaller projects that you know are going to happen and you have very high conviction. If you do it, it will drive value and the very high conviction things. Maybe you put in the baseline plan and the very sort of big bets. Maybe you don't or you don't put all of them in the, in the plan to make sure that you're going to be okay. The other, the other question we get often is, you know, how should I think about budgeting So 3G, the private equity firm from Brazil was famous for what they call zero based budgeting, meaning every year managers have to walk into the budgeting process and explain every line item and argue for why they need every line item, which is not traditional, right? Historically, the way it worked is you had whatever you spent last year, and you'd only ask for the incremental. And the reason 3G did that is they found that a big companies, there was a lot of. Spend from the past year that wasn't necessarily valuable. And so they wanted to rethink it each year instead of assuming last year was correct. I remember as an example, one of the big companies I was at without naming a specific name at the end of the year, any money people still had on their budget, they spent on holiday parties. And so there'd be like eight holiday parties that you went to because they knew they needed to spend it and if they didn't spend it, they wouldn't get it in their base budget for next year. And that's a terrible way of budgeting because people are packing costs in in bad ways instead of thinking about how to really drive revenue. I'm not saying you have to do zero based budgeting, but do start with like an analysis of what is actually the valuable cost that was driving. Either revenue or driving an outcome for you and then build from there. Don't just assume all spend from last year was correct. And then the other one is we, we like having what we call sometimes a vendor cap table. So often people talk about the cap table in terms of equity or your stock, but vendor cap tables, who are all the vendors that you're working with and understand, you know, what are those contracts? When are they coming up? How much are you spending? Can you bring them down? Can you bring them up? It's one of the bigger mistakes people make where they accidentally. forget that they're going to have to spend that amount again next year for an analytics vendor, or they forget that the vendor is related to the number of seats or the number of employees and the cost is really going to go up. So make sure you have a pretty accurate vendor cap table and understanding what those contracts look like as you're doing the cost. So, so then, you know, to your point, you know, Rebecca, you, you probably have an internal plan and you have an external plan, like, how do you start, you know, getting people involved in this? Who builds this plan? Like who actually does it at an early stage company?

Rebecca Greene: 11:08

Yeah, I mean, I think the process starts. The founder saying, okay, we're going to run this process. Here's how it's going to go making it really tight ship. Because as you said, people will fill the space, you know, on our team, it's our director of finance, who leads the actual process of meeting with each of the individual department heads, collecting their assumptions, kind of laying out what he needs from them to be able to build up the, you know, the bottoms up version of it. And then. Meeting with us as well, so we can kind of give the top down guidance. So, you know, this is the growth rate we're looking for. These are the ratios we're looking for. So that's kind of how we've run the, the process.

Alex Levin: 11:45

Yeah, and then typically we do one thing slightly differently than other companies. A lot of companies will lock their budget before the end of December. I've been burned so many times where December is a little bit off of what, either positive or negative, what you thought it would be. And I refuse to lock the set, lock the budget until after December. But, you know, at that point, typically the board will approve the budget and, you know, you'll start presenting it to teams. And usually what we try to do is, you know, boil it down to one or two numbers and, you know, two or three main initiatives over the year. That way, you know, you can keep repeating those one or two numbers and two or three initiatives every single all hands for the next six months. Because it takes that long before. Everybody is on board with exactly what the goals are for that year. You'll know it's successful when you can randomly walk around the floor and ask somebody what the company's goals are for the year, and they can just recite them. And if everyone can recite them, like you've said it enough, but until that point, just keep saying it. Because it's amazing how hard it is to make sure everyone is on the same page about those goals. And, you know, hopefully you've chosen the right projects and, you know, things start moving, but, you know, how do you think about reforecasting then? So you're at the end of Q1 and something's happened, you're either above or behind the plan. Like, how do you start thinking about, do you change the forecast or not?

Rebecca Greene: 13:02

Yeah, I look, we've, we've done it different ways. We haven't ourselves been consistent again. I think when we were smaller, it was less important to be. You know, accurate, and I think it was more acceptable to be off higher, higher low. And so it wasn't worth the time or the exercise to go and constantly reforecast every quarter, whether we were above or below. And I think that's probably true of a pretty early stage company. I think as you get bigger. It is more important, like, on a quarterly or half year basis to re, forecast 1, because you need to manage your cash, right? I need to be really honest that point be made. It's easier to be wrong about revenue. It's in. It's to be right about costs. And the problem is, if you're like, spending to your costs, and then you're off on revenue, you want to make sure you have time to pull the levers you need to on the cost side. So I think quarterly. Certainly, you should be looking at a quarterly, if not reforecasting quarterly. So that's that's 1 thing I would think about. I think another thing to think about is, what's the value of reforecasting? It should be that you're going to make changes. So, other than on the cost side, doesn't mean you bring forward certain hires or pushback certain hires. Doesn't mean you change certain projects. You're going to be working on. So, in some ways, it's the thought exercise. It's less about just going to the board and saying, I. We did it or we didn't do it. And like making us all feel better about it. It's more about the thought exercise of what were we right or wrong about and what levers need to change and and how does that change the set of actions we're actually taking.

Alex Levin: 14:24

Yeah, and, you know, I think it's sometimes a difficult conversation internally where, you know, some teams will be beating their target. Other teams will be missing their target. And, you know, sometimes you feel like, oh, if you bring down the targets, people will be deflated. Or if you increase the targets, people will be annoyed. But you know, in the end of the day, you can still do two things, right? You can hold the annual planning steady. You can say this was the 2024 plan with X number, and you can also have a reforecast. And there are two different things, right? So people can still be paid off of the annual planning, but you can use a reforecast to make sure that you're accurate about which projects you're going to invest in and what actions you have to take. So it's not a bad thing to have both of them. We actually, at this point do reforecast on the revenue side on a weekly basis. On a cost side, we're getting to the place where we do it on a monthly basis and eventually need to do that on a weekly basis as well, right? As you get bigger to your point, you have to get more and more accurate to make sure you're making the right decisions. I think the, yeah, the biggest risk in all of this is a plan that is back weighted on revenue before weighted on cost. Right. It's an easy plan to start building and look at the year and say, Oh, over the year, it looks fine. What ends up happening is you raise your costs in Q1 and that revenue doesn't kick in. All of a sudden you find yourself really missing your burn targets and being in a position you're burning much more money than you expect. So if you don't have very tight controls on reforecasting and on your burn, you end up in a position. Where you're running outta money. So, you know this is hopefully a quick primer for folks. As you go through this some of the tools that I recommend, you know, making sure you have in place if you don't have yet, is obviously an accounting system. So QuickBooks is the most common early days and the later days people go to NetSuite, you know, have a very good fp and a. Person. So finance person who's helping you do this planning, who's ideally done it before or seen a process before, you know, it's a very difficult thing to sit down with budget heads or people who are heads of their department and manage expectations about what they need to do from costs and revenue. So having somebody not see it is very important. You know, typically as you get a little bit bigger, there are some software packages that will help with planning, but definitely not required to have Anaplan or something like that. You know, Excel is probably the most common until. You're at least at, you know, 50, a hundred million in revenue. And then I think from there, you know, it's just about having a very good process of what they typically call budget versus actual or BVA. So making sure that you close each month as quickly as possible. So for an early stage company within 10 business days or 15 business days is okay. For public company would be faster and then make sure that you're looking back and saying for the last month. How did we do on revenue versus the budget? How do we do on cost versus the budget? Breaking that down to each budget head and giving them their numbers, right? If you can't get them their numbers fast, they can't figure out how to change what they're doing to make sure they're doing the right thing. So making sure that feedback loop is quite short is going to be important. And every year you'll get better at it. I think it's something that like becomes very fun, right? Where, you know, as the basics become easy, you can start thinking about what are the investment areas you want to double down on so that's all for today. So please come back and listen to 15 minute founders again. Thank you very much.