Q: How far in advance should we start our annual planning process?

A: As a rule of thumb, I would suggest that you begin the annual planning process four to six months before the beginning of the next calendar year.

Many large corporations begin planning several years in advance, and this is why larger firms have a well-deserved reputation for moving as slow as dinosaurs. For a smaller, growing firm, it is a waste of time to do any detailed planning more than a year in advance; the company, your markets, and your competitors’ plans will have changed too much to make such long-term planning valuable. The closer you are to the upcoming year when you plan, the more relevant your plans will be.

On the other hand, though, if you wait until the last minute to start annual planning, then you will have to rush through the process to get it done. The emphasis then will be on getting the plan done, not making it as good as possible. You and everyone working on a plan need to have enough time not only to get the plan done, but also to do it well. You should also have time to weigh major alternatives and reconsider how well each function contributes to the overall plan after you’ve completed it.

Q: Should all parts of the annual plan be given equal attention?

A: No. If some parts of your business will change little during the next year, then there is no reason to summarize these areas in great depth.

Remember that the role of the owner or CEO is to make sure that the planning efforts focus primarily on the areas that will really matter to the success of your business. Often, planning can become focused on rivalries between different functions or lost in debates about factors that are relatively insignificant or not within your control. The CEO needs to see that plenty of attention is given to larger issues, such as:

  • How many new products should we launch next year?
  • Why is our marketing budget so high as a percentage of sales?
  • What are the risks of increasing prices on our core products or services?

Q: What level of detail should budgets contain?

A: Budgets in business plans created for the purpose of attracting investors should have little detail beyond breaking out expenses by departments or functions. You should, however, have supporting details available upon request.

Similarly, when creating annual plans, even for a very small, one-person business, I suggest that you have two levels of detail. One should be a budget summary that has one entry for projected sales of each major product or service line, and one entry for projected costs in each functional area, such as marketing, cost of goods sold, etc. A budget summary is very important in helping you get a handle on the cost structure of your business and its major trends.

Then have a separate, more detailed budget for each functional area. But don’t get buried in detail. I would suggest a maximum of 10 to 20 entries for projected expense categories if your business is small.

Q: How hard should I try to stay within budgeted expenses?

A: You should be more concerned with seeing that each function stays within its entire budget. For example, if the marketing department spends much more than projected on publicity, but makes up for it by spending that much less on advertising, then that’s fine.

Don’t be terribly concerned about staying within budget if sales are above budget. However, more than once I have let expenses soar above budget because sales were above budget. Then, later in the year, I discovered that expenses rose more quickly than sales. So if sales are increasing, make sure expenses increase only by a like percentage.

Q: Is it worthwhile to completely redo the budget in the middle of the year?

A: Generally, no. It just takes too long and too much effort to make it worthwhile.

If your sales are running way above budget, try to make sure that expenses are not rising disproportionately. Watch out particularly for new, discretionary expenses that were not in the budget—they can always be added to the budget for the following year.

If your sales are running a little below budget, try to cut expenses in a few limited areas. However, if your sales are running way below budget, I strongly recommend reworking the entire plan and carefully reexamining each and every item of the budget.

Q: What should I watch out for in the annual planning process?

A: Most of all, you want to keep the emphasis on considering major alternatives and new initiatives and reexamining the ways the firm is currently doing business. You want to make sure you and the other managers (if there are any) don’t spend all of your time just making sales and expense projections—that’s just forecasting the future, not managing the business. For example, if you are currently shipping your product to local customers with your local delivery truck, you don’t want to just project how much it will cost to run the truck next year. Instead, you may want to consider selling the truck and contracting the work to an outside delivery service.

Q: Do salespeople tend to be overly optimistic in forecasting?

A: Yes. But there are some who try to be very conservative so they have less pressure during the year or so they can look better when they deliver sales that are way over budget. After you work with different people you will find how people in every functional area tend to approach the budgeting process, and you can work with each one to be as realistic as possible. Also, I’m a big believer in frank and open discussions about budgets, and I think that people from other functional areas can often offer constructive suggestions and serve as a reality check for one another.

Q: Why do I need a budget? Can’t I just try to be really frugal on every expense?

A: Believe me, I’ve tried this approach—and it never worked. Running a business of any size is too complex to do by the seat of your pants. I’ve found that even if I try to be as cheap as dirt on every expense, without a concrete plan, costs can still mushroom out of control and wipe out profitability.

Q: How can I tell what the costs for different parts of my operation, net profit, and goals should be?

A: You need to get data for firms in your industry—perhaps from an industry association. Sometimes trade magazines and newsletters publish statistics for their industries. Compare your numbers with firms of similar size in the same industry.

Q: How long should my annual plan be? 


A: Whether you are creating a business plan to raise money or an annual plan to run your business, keep it succinct. People tend to use too much detail when creating plans. If a business plan is too long, it might be skimmed. If an annual plan is too long, focus on what is really important so it doesn’t get lost.

Q: Who should be involved in planning? 


A: For both business and annual plans, you need to have key employees create their area budgets. Then work with them until you are satisfied. Have key people come together to get the plan in sync and to get any disagreements out in the open. The more input people have in creating the plan, the more responsibility they will feel toward it.

Q: Isn’t an annual plan primarily a budget?

A: No! I find that if an annual plan includes any financial projections, then everyone tends to focus on them almost exclusively, deemphasizing the qualitative aspects of planning. While you do need to use numbers to run a business, numbers alone lead to a shallow plan. Companies run just by the numbers lose direction, drift from their strategy, and never realize their full potential. It is essential to the planning process to articulate clearly what the direction of the company will be for the coming year and what the role of each person will be in supporting the direction of the company overall.

Q: So what happens after our actual monthly results don’t match up with our plan?

A: In the real world nothing ever goes exactly according to plan, but your annual plan gives you a way of measuring your company’s actual performance. Meet with key people at least once a month to review how the company is performing relative to the plan. The emphasis should not be on browbeating managers whose areas are underperforming, but on how performance can be improved in the future.