Ahh December. Between closing out the year, performance reviews, holiday parties and family activities, it is always a crazy time of the year. And to top it all off, for most of our portfolio companies it also happens to be the time when annual budgets are prepared and presented to the Board for approval. Having been through several such sessions in the last couple of days, I thought it would be worth sharing some of the best practices I have seen across our portfolio.
- Start early, but not too early. In large companies, the budgeting process often starts in early October. For earlier stage companies where much is in flux, this obviously does not work. Conversely, starting the internal process in early December does not work either. The best approach I have seen is to develop a high level forecast for the upcoming year in November and present that to the board for general reactions before refining and honing for final approval in late December.
- Use the budgeting process to drive alignment across your organization. While it is easy to look at budgeting purely as a financial exercise, the most important part of the process is using the financial plan as a way to represent the organization's goals and priorities and to use the planning process to drive alignment across the company on these issues.
- Shoot for a confidence level of 80%. There is always a debate in budgeting as to whether the plan should represent a stretch goal or something that is easily achievable. While the stretch goal approach is often initially appealing under the theory that if you don't plan for greatness it may not happen, my experience has been that companies that have a history of hitting budget, tend over the long run to have more success. While this is not necessarily a causal relationship, consistently hitting plans has a way of improving morale and developing a more accountable organization. Conversely, letting the pendulum swing to far to "sandbagging" does indeed have the effect of not letting the dreams be realized, so in the end a plan that is a mixture of both and has a 70-80% confidence factor feels like the best middle ground.
- Explicitly identify upside opportunities. Related to a plan that is 80% likely of being achieved, i think it is critical in the budgeting process to explicitly identify upside opportunities that could change the company's trajectory and what actions are being take to see some of these to fruition.
- Use a trigger based plan if you are operating in a highly dynamic environment. For really early stage companies, or companies that are operating is a state of great flux, clearly identifying triggers that will move the company from the current plan to a new plan is a good way to ensure alignment. For example, if you are running a company with an inside sales model, saying when leads reach a level of X or qualified opportunities of Y that will trigger hiring several more sales reps. this allows you to this aggressively, but also realistically relative to resource constraints.
Finally, after all of this, remember your goal its blow through your objectives such that by mid-year it is back to the drawing board!