Politics of Annual Planning
Planning cycle is probably the most important period in FP&A. It is certainly one of the busiest times in the FP&A department’s schedule.
Normally you would have a submission date and everything else is built around that submission date. If you work in an affiliate office and you are submitting the business plan to regional HQ you build your internal schedule (internal reviews, meetings) to make sure you have sufficient time to prepare and validate your assumptions, challenge your internal stakeholders to build a realistic but ambitious plan, prepare the slides and submit the numbers on time or even ahead of time. If you are in HQ you build your internal schedule to make sure you have enough time to review and consolidate the submissions with the affiliates and make the necessary changes before presenting the plan to senior management.
Being in a junior Finance role you have a lot of technical work during that period. But you need to keep in mind a few things that will help you better understand the overall picture and put your work into a context.
The most common approach is that the HQ already knows the overall target that they need to reach for the next planning period. This target is taken from the mid/long term strategic plan and investor expectations. The precise mechanics may vary and are not relevant. What is important is that your affiliate will get a sales/margin target based on your story.
There are 3 things that I find common to almost any company when it comes to the annual planning exercise.
1. The importance of consistent story. Remember we talked about consistency? The “story” is the ultimate manifestation of your consistency. It is how you explain where you are now, where you are going and how you are going to get there. The creation of a story is usually a job of the General Manager together with a Finance Director but roles may differ. The story is convenient because people understand stories better, they can relate to them and it feels more predictable. If your story has too many new inputs every time you present it, then it is no longer a good one. If you have not been delivering your sales numbers and you change your reasons for underperformance too often — it signals that you do not know what is going on, you are not in control. Alternatively, if you are not delivering on your sales numbers but this risk has been highlighted in the past and the action plan is in place to mitigate this risk — it looks much more credible. Even if you are delivering on plan or exceeding plan but your story is not consistent you could still look pretty bad because the senior management might conclude that your performance is pure luck and again you are not in control.
Another important topic is your monthly analysis of the actuals vs. forecast. This analysis normally goes up the hierarchy and is read by the Senior Management of your company. So whatever explanation and rationale you are giving when you are preparing your Planning slides it needs to tie into the ongoing story about a particular brand, product or SKU. The most common and obvious mistake is to provide an unreasonably optimistic plan for the product that has been consistently underperforming without listing clear drivers why and how the trend will change. Or vice versa — providing an overly pessimistic forecast for the product that has been showing great performance year to date. Those forecasts could be real but in that case, they have to be justified and explained.
You need to know your story and be consistent about it. And your job as an analyst is to provide the input to build the story and make sure that the parts you provide and your analysis are as consistent as possible. This means calculations without errors, solid assumptions and clear backups.
So when you are staying late in the office preparing those backups you need to keep in mind that they serve an important purpose of ensuring the credibility of your story and ultimately the credibility of your management.
2. No surprises. Big companies do not like surprises. Even the good ones. Of course, it is always better to have a good surprise than a bad one but this is again coming back to sticking to your story and showing that you are in control. Very often business plan presentations and reviews are a formality and an opportunity to ask additional questions but rarely a place to make new decisions because usually the decision has already been made. There is a tradition of pre-calls in such reviews. An affiliate’s CFO calls the regional CFO, a regional CFO calls the CFO from HQ and so on. It is usually the same story with the General Managers. A pre-call is essentially an informal heads up on what the submission numbers would look like, testing the waters for potential risks/opportunities and getting a feel or even an exact understanding of how greedy/generous the HQ or the Board are going to be this year. What is the pressure level coming from the top, how other affiliates are doing and what it could mean for your own target. So normally when your slide deck and submission numbers are being built the overall direction has already been aligned with the senior management and your job is to make sure that the numbers support the story and if they don’t, you need to smoothen the edges.
3. Buffers are OK. Another important point that you will not hear anyone talk about explicitly is buffers. Sometimes they are called cushions, extra fat, reserves (not necessarily in the accounting sense) or sandbagging. Buffers are your secret joker, your room to maneuver when tough times come. A buffer can be a sales forecast that you know is understated and you will do better because you will sell more units or because you know you can give less discount or it can be an accrual that you will be able to reverse if needed. When I talk about accruals I only talk about formally compliant transactions. That is if you had internal or external auditor check this accrual, it will have all the supporting documentation and it will be justifiable. Experienced CFOs know how to work with Business to make buffer accruals and raise no suspicion. There could be much debate about whether such accruals while formally compliant are ethical from a purely moral point of view there is no question that buffers are a common practice. CFOs at VP level want their direct reports to have some buffer and it cascades down. But they want to know how big these buffers are and where they are booked. Every experienced CFO wants to have something in the pocket for tough times which will make him look good in the eyes of the General Manager. The art here is not to make it look that you have been hiding something all along. The best practice is to be transparent about the buffers with your General Manager but keeping 20%-30% to yourself. As you progress in the year some of the buffers might not materialize or more risks come up. That is why buffers are rarely a 100% set in stone figure. Usually, it is a range. No one talks about buffers explicitly during the reviews, occasionally it does happen but that is technically not a buffer anymore. And the usual practice is that an affiliate’s CFO knows his risks and opportunities and is transparent with the management. Whatever is not listed in the slides is a buffer and he usually shares this information with his direct boss and the General Manager. Your job is to watch for those potential buffers, identify them and be fully transparent with your FD about them. You need to maintain a buffer spreadsheet and update it up and down as the year goes on. This will not be a part of a formal submission but will serve as a reserve to absorb some bad news in the future. Remember that sales, marketing, and ops might have their own buffers and it is important to understand how much cushion they are sitting on. You do not want to present a forecast that has too many layers of sandbagging. Most departments will also find ways to spend money by the end of the year, because of the mentality “if you don’t use it you lose it”. For example, if a maintenance department had less spend this year than their next year’s budget will be cut from above to this year’s levels. This creates incentives of shopping sprees towards the end of the year to show that all that budgeted spend was necessary. Understanding this behavior will help you find ways to save money from some areas when under pressure or challenge validity of departmental forecasts / plans.
Planning period can be tough. It usually takes a long time. And during those weeks or even months, you work longer hours, sometimes during weekends. Moreover, your daily routine activities are still in place so you need to learn how to re-prioritize your tasks and get more things done. However, first and foremost, the planning period is an opportunity for you to shine and show your work. This is the time when you demonstrate your knowledge of the business, your communication and organization skills, your cognitive abilities and how well you can focus for longer periods of time.