Building an annual operating plan and budget from your strategy

Start from the year-three target, not last year's actuals

Begin with the destination in your three-year plan and work backwards to what year one must deliver. Starting from last year plus 10% is how companies drift away from their own strategy.

Say [Company] has $8.0 million in revenue and a three-year target of $12.0 million, with recurring service rising from 30% to 40% of revenue. The three-year plan sets year one at $9.0 million: $6.0 million project work and $3.0 million recurring. Those two numbers are the frame. Everything in the operating plan either supports them or explains why they will be missed.

Build revenue line by line, month by month

Revenue should be built from the drivers that produce it, then spread across months using your real seasonality. A single annual number divided by twelve hides the months that will decide your year.

For recurring service, the drivers are agreements and average value. If [Company] has 1,600 agreements at $1,500 a year, that is $2.4 million. Reaching $3.0 million needs 2,000 agreements at the same value. With 12% annual attrition, about 190 agreements lapse, so the team must sell roughly 590 new ones, or about 49 a month. That is a sales target a manager can own.

For project work, the drivers are quotes, close rate and average job size. At an average job of $15,000 and a 30% close rate, $6.0 million needs 400 won jobs and about 1,335 quotes, or 111 quotes a month on average.

Now apply seasonality. If your history shows a slow first quarter and a heavier second half, the plan should carry that same shape rather than a flat line. Here is a simple quarterly view:

Recurring revenue climbs each quarter because new agreements accumulate; project revenue follows the season. Adjust the shape to your own business: a company with a strong winter will look quite different from one tied to the building season.

Gross margin and overhead

Set gross margin by line, then decide overhead deliberately, because overhead is where operating plans quietly fail. Each overhead line should either keep the lights on or fund a named initiative.

At 28% on project work and 45% on recurring, [Company]'s gross profit is $1.68 million plus $1.35 million, or $3.03 million. If overhead is $2.0 million today and the plan funds three initiatives, overhead might look like this:

Operating profit is $3.03 million minus $2.19 million, or $0.84 million, up from about $0.65 million. The salary figures here are placeholders for illustration; use your own loaded costs, including benefits and payroll costs, and confirm them with your finance lead.

Hiring timing and its effect on the year

When a person starts changes the budget more than whether they are hired. A role that costs $72,000 a year costs $60,000 if it starts in month three and $36,000 if it starts in month seven.

List every planned hire with a start month, a fully loaded annual cost and the revenue or capacity it is meant to support. Then ask an uncomfortable question for each one: if the hire starts three months late, which target slips? If the answer is "nothing", the role may not belong in this year's plan. If the answer is "recurring revenue misses by $200,000", the hiring date deserves the same attention as any sales target.

Cash: the part that keeps owners awake

A profitable plan can still run short of cash, so test the plan month by month against when money actually arrives and leaves. Growth in particular uses cash before it produces it.

A quick check: if customers pay on average 45 days after invoicing, receivables sit at roughly 1.5 months of revenue. At $8.0 million, that is about $1.0 million; at $9.0 million it is about $1.125 million. Growing by $1.0 million ties up roughly another $125,000 in receivables, before any inventory or deposits. Add the hiring costs that land before their revenue, the timing of GST/HST remittances, and any seasonal dip, and you can see the lowest cash month of the year. Plan your line of credit and owner draws around that month. How remittances and taxes apply to you is a question for your accountant.

Budget versus forecast through the year

Keep the approved budget as a fixed yardstick, and keep a rolling forecast beside it that you update every quarter. Comparing actuals to both tells you whether you are off plan and whether you will recover.

A simple discipline works for most owner-led firms:

1. Close the month and compare actuals to budget by line within ten working days.
2. Explain any line more than 10% or $10,000 off, whichever is larger, in one sentence.
3. Each quarter, reforecast the remaining months and record the reasons in the quarterly strategy review.
4. Change initiatives, not the budget, when the forecast falls short.

Funding initiatives, not wish lists

Every initiative in the operating plan should carry a cost, an owner, a finish month and the result it is expected to change. Initiatives without all four are ideas, and ideas belong in a parking lot until next quarter.

A one-line initiative register keeps this honest. For [Company], it might read:

Three to six initiatives is plenty for a company of this size. If the register grows past eight, ask which ones the managers can genuinely run alongside their day jobs; a plan that assumes everyone has spare capacity will be late everywhere at once.

Who builds the plan, and when

The finance lead owns the model, each manager owns the drivers for their area, and the owner approves the result. A facilitator can hold the process together, but the numbers have to come from the people who will be measured on them.

A workable timetable, counting back from the first day of the fiscal year:

1. Twelve weeks out: confirm the year-one targets from the strategic plan.
2. Ten weeks out: managers submit drivers for their lines, such as agreements, quotes and close rates.
3. Eight weeks out: first full draft of revenue, margin and overhead.
4. Six weeks out: cash test and hiring calendar; first leadership review.
5. Four weeks out: final changes and owner approval, followed by board review where there is one.
6. Two weeks out: scorecard targets loaded so month one can be measured.

A checklist before you approve the plan

Before approval, the plan should pass a handful of plain tests. If it fails one, fix it now rather than in month five.

• Year-one revenue matches the strategic plan, or the gap is explained.
• Every initiative has an owner, a budget line and a finish month.
• Every hire has a start month and a stated purpose.
• The lowest cash month is identified and covered.
• Monthly targets reflect real seasonality.
• The measures on your KPI scorecard can be pulled from the same numbers.

Getting help with your operating plan

StrategyPlanning.ca is a Canadian business consulting service in the Sedighi.ca and SAZ.ca group, based in Vancouver and led by Ali Sedighi, MBA. We build the annual operating plan and budget with your leadership team and finance lead, online by video or in person, and the pricing page shows how that work is scoped. Call or text (604) 632-4959 (a short text is welcome), or email us with your fiscal year-end and current revenue.