Don’t skip this step in your planning process
Planning season is upon us. For everyone involved it can feel like preparing for battle... We must fight to protect our resources!
In the spirit of helping folks run a smooth and effective planning cycle, I’d like to share one of the most important lessons I've learned from having run both successful and painful planning processes. What I share below may sound obvious, yet it’s a message I needed in my early days at Intercom and one I hope helps other early-stage Finance hires.
Running great planning processes starts first with how we engage our stakeholders - how they’re involved and the context they have from the outset. Great planning processes:
Involve stakeholders in the earliest, most high-level conversations.
Engage stakeholders in a discussion around how the plan for the year ahead fits into the broader financial goals of the company.
Provide concrete context for the most critical tradeoffs within the plan.
I’ve been a part of and seen many planning processes where the first pass of a plan is built in a closed room between the CEO and Head of Finance 😬. Between the two of them, they decide the high-level revenue and cash burn goals. They roughly allocate resources between teams and then go back to everyone with the solution. I think many would be surprised at how often this happens.
I’ve also been a part of and seen equally bad planning processes in which the plan is solely about the year ahead. It’s not connected to the longer term financial goals of the company. It doesn’t fit into a narrative around where the business must be over some longer time horizon. The plan ends up being a collection of initiatives trying to get to an end state without a ‘so what.’
In those cases, the end result is a plan that’s brute force through the organization. Folks might understand the actual targets and goals, but they lack the context for why it’s so important to deliver against them. Or they lack the context for why they were allocated a certain set of resources - how many of us have encountered a Head of Product and/or Engineering who doesn't understand why they can’t just hire more PMs and Engineers?
How do we avoid these mistakes? I’ve found one conversation to be critical, and it needs to happen before jumping into any of the nuts and bolts of the actual plan. It’s a conversation anchored on two metrics: cash runway and future valuations.
Many early Finance leaders hesitate to bring these two metrics to the forefront of planning because, well, future valuations are hard to pin down. They’re subject to the whims of the market, and we, as Finance folks, don’t like to misset expectations (to which I’ve learned it's OK to give ranges). Similarly, cash runway can feel like a scary and highly sensitive metric to put in front of folks. After all, on the other side of runway is the abyss.
Yet these metrics are particularly powerful for the same reasons they’re scary. Future valuations hit people directly in their pockets. You better believe everyone in that room understands exactly what it means to attain a certain valuation (unlike attaining a certain growth rate or revenue number). Similarly for cash runway, the abyss invokes action.
Most importantly, though, a conversation on runway and valuation brings to the forefront the core tradeoff with which every startup grapples. Do we shorten our runway (i.e. invest more) to aim for a higher valuation (i.e. grow faster)? This is just another way of asking, "How much risk do we want to take on as a business?" This conversation then allows us to demonstrate that hiring the extra team of engineers and PMs will increase our cash burn, forcing us to fundraise at a lower valuation unless that team is directly additive to revenue growth.
Tensions throughout a planning process typically stem from unknown, unspoken, or unresolved disagreements regarding risk. A conversation on cash burn and valuation does a great job of aligning incentives and grounding the planning process within a shared understanding. Moreover, it can act as a rallying cry for stakeholders to fight and charge against the plan. As Finance leaders this then is our first role in building a successful plan.