Next year (annual planning, part II)
Last week’s newsletter was originally meant to have a quick, one-paragraph introduction before launching into a piece about annual planning. I wanted to acknowledge how uniquely hard it is to get started on this annual exercise this year; before I knew it, the intro had taken over and become a whole article of its own. I guess it wanted to be written, as woo-woo as that sounds.
This week, let me look forward and honour the fact that you probably signed up to this newsletter to get some actionable entrepreneurial finance insights, not some semi-deep reflections on the life of Jana. So let’s get practical!
Every business needs annual planning. Yes, even a small one. And yes, even in a pandemic.
Here’s how you do it.
Step 1: Do a post-mortem
It’s not enough to know how last year went on the whole; there is a lot of value in going granular. Which products sold well, and which ones didn’t? Why? Which customers took to your value proposition the most? Which marketing techniques produced the best results? Where did most of your revenue come from? And your profit?
Then look at the bad things too, the ones that may be painful to re-live but will be so valuable to fully understand and learn from. What didn’t work, despite your best efforts – and why? What are things that, looking back, you’d consider mistakes? Which customers weren’t interested, and why? Which campaigns were a waste of money? Which things ended up producing more headache than value?
Understanding your past – not in the “this year sucked” kind of way, but on a really practical level – is always helpful; both to avoid repeating the same mistakes and to be able to double down on what works. (More on that later.)
Step 2: Set your growth goals
There are only three sensible categories of growth goals when it comes to business planning.
(1) At the very least, you should be looking to maintain the status quo. That’s kind of obvious, and unless you want to eventually go out of business, planning for anything less would be a mistake. Maybe you’re perfectly happy with where your company is, and if that’s the case who am I to tell you that you should want more. Or maybe you’re looking to make some changes to your business and it wouldn’t be practical to try to grow while you do them. That said, I’d still encourage you to think about making improvements, because in this “ever-changing” environment, whatever worked yesterday may not work tomorrow, and it’s awfully easy to plan to maintain your company as it is, not innovating or improving things, only to see it vanish into thin air.
(2) Perhaps you’re looking to grow a bit. The definition of “a bit” differs by company stage and industry, but let’s say single to low double-digit revenue growth falls in this category. While that’s a perfectly reasonable position, it is good to understand your reasons why. Are you looking for moderate growth because your supply chain would collapse if your business tripled? Or is it because you’re scared of going too fast? Getting a hold of the why is really helpful, whether to reassure you that it’s what’s best for your company or to help you realise that damn, you actually do want to take off like a rocket ship.
(3) Speaking of a rocket ship, maybe you’re looking to grow a lot. Again, this will mean different things for different people, but at the very beginning, it is entirely possible to double, triple, or even quadruple your revenue from one year to another. I like the concept of 10X as a mental exercise; not because it’s key to achieve that level of growth, but because it is so clearly, distinctly different from growing “a bit”. If you choose this option, congratulations! It’s the first step to actually getting there.
When setting goals, I always recommend erring on the side of ambition – that way, if you don’t achieve 100%, you still land in a pretty good place. The opposite doesn’t hold true – companies that plan for a 5% annual growth don’t tend to end up at 300% (although, maybe Zoom – but I bet they were pretty ambitious pre-Covid too).
Step 3: Figure out how to get there
Broadly speaking, there are two ways to grow – doing more of the same (assuming it works) and doing something completely new. Some call it momentum vs. strategic initiatives; some call it business-as-usual vs. new business; I don’t care what you call it, but it’s definitely a thing.
If your goal is to grow a bit, and you already know what you’re doing – you have profitable products or services which customers consistently purchase – you can afford the safe option of doing more of the same. Hiring additional sales people, increasing marketing spend, opening another store location, appearing on a few more podcasts, scaling up an affiliate programme, that all falls into this category. It’s not a new thing, but it’s a thing that works and reliably yields results. Here’s where your exercise from Step 1 comes in – it should direct you to the right activities. And, perhaps obviously, don’t be afraid to let go of anything that really doesn’t work, and make space for the stuff that does.
If your goal is to grow a lot (hello, the 10X thought experiment!), the previous approach can be a part of what you do, but it won’t be enough on its own – you need to break new ground. Launching new products or services (especially if your current ones don’t scale – I’m looking at you, face-to-face services and custom-made products), or entering new geographies can fall here, as well as serious overhauls of your marketing or operations. Make a list of five to 10 things that have a real potential to help you 10X your business, rank them based on the size of the revenue opportunity and the feasibility (is it doable and what would it take to execute?), and pick 1-3 things with the most points to execute.
It is never a bad idea to do more of the things you already see working well and break new ground at the same time, even though it can be a tough balance. That way, you get the best of both worlds – keeping and developing the existing business and doing whatever has the potential to take it to a whole new ballgame. If you’re lucky enough to be in this position, don’t be afraid to hire to make sure you’re not over-stretched and under-resourced, which will lead to you compromising your existing business, your new initiatives, and your sanity.
And that’s pretty much it. Yes, of course you can and maybe should go more granular and plan every initiative down to the t, but these are the three basic components of annual planning. Know what happened last year, know what you want to happen next year, and make a plan to make sure you get there.
I’m now going to immerse myself in my own 2021 planning (fuelled by plenty of Christmas cookies). I’ll be back in January with the new and improved Tiny CFO! Thank you for sticking around, you’ve been an amazing company.
Love, cash flow, and happy holidays,
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