Your roadmap to success: How to create an effective annual operating plan (AOP)

For SaaS CFOs and finance teams, the annual operating plan (AOP) serves as a bridge between high-level vision and day-to-day execution. 

Creating an effective AOP is not without its challenges, though. Aligning sales, marketing, and operations with finance can be tricky for CFOs and finance teams. Further, evolving SaaS trends, sudden changes in customer behavior, and market dynamics can impact the forecasts in your AOP. 

Learn more about how you create a comprehensive AOP for your SaaS business and navigate the challenges involved by leveraging SaaS financial planning software.

Understanding the importance of the AOP for SaaS businesses

The AOP is a critical part of financial planning for a SaaS business. We should note here that it’s not uncommon to see the terms “AOP” and “budget” interchangeably. However, an AOP and a budget are not the same thing. While both types of planning are related and certainly critical to SaaS businesses, they differ in purpose. 

In SaaS, an AOP provides an operational roadmap to help the business meet its targets and track its progress throughout the year. Whereas, a budget is a plan that helps to control spending in the business to ensure it is focused on activities that help achieve the goals of the AOP. 

The AOP outlines key financial and operational elements, including projected sales revenue, cost of services, operating expenses, net income, headcount planning, and resource allocation. 

The AOP also provides visibility into your SaaS business’ cash flow, ensuring you ample liquidity to meet financial obligations and prevent shortfalls, align incentive structures, as well as manage funding requirements accordingly. 

With clearly defined financial targets and KPIs, SaaS business leaders, in collaboration with managers and department heads, can easily track progress against targets, review financial health against current performance, as well as revisit and manage goals and initiatives to drive growth through the year. 

How to create an annual operating plan

AOP creation is a collaborative process that can take anywhere between 2-4 months. The initial phase focuses on setting goals and the latter part of the process is dedicated to refining, iterating, and securing approvals. The process usually starts in the last quarter of the current or fiscal year. 

While the leadership and finance team typically leads the development of the AOP (informed by the vision and objectives outlined in the overall strategic plan), it is finalized with inputs from key departments—such as sales, marketing, product, and R&D. This helps to ensure that the plan accurately reflects each department’s performance KPIs, targets, and budgets, and is aligned and has buy-in of all stakeholders.

A step-by-step guide for creating an AOP

Here are five important steps to develop a robust and realistic annual operating plan.

Step 1: Know your goal post 

The first step is to determine where you want to be by the end of the coming year. This goal can come from your strategic plan or top-down guidance from leadership or key stakeholders (including board members/investors). 

In smaller companies, the CEO may set the targets directly. However, in larger organizations, along with top-down direction, the process involves bottom-up inputs from the department heads (see Step 4). 

Step 2: Create a calendar

The goal of a calendar is to ensure that all stakeholders provide their inputs on time. This gives finance teams enough time to compile, analyze, and correct discrepancies before the final review. 

• Plan in Q3: You should start AOP planning in Q3 or when there is enough data from the current year to assess performance and future needs. This gives you ample time to gather insights from each department, build financial models, and set targets accordingly.
• Draft by early Q4: Aim to have an AOP draft ready by early Q4 to facilitate discussions with key stakeholders.
• Finalize by year-end: Finalizing the AOP in December or at the end of the fiscal year ensures that all teams are aligned and ready to execute it in the new fiscal/calendar year. It is also important to identify the date of the final AOP presentation to the board to allow enough time for feedback and revisions.

You can use the same calendar to schedule monthly or quarterly updates for your key stakeholders to keep them informed of the business’ financial health and performance as the year progresses. 

Step 3: Align the goals and objectives of different departments and teams

Every department needs to understand how their individual targets contribute to the larger company objectives. 

Misaligned goals or communication gaps can slow the planning process. Break down the company’s top-down goals and align them with each department’s objectives and KPIs for the year.

If there are discrepancies between what the departments think they can achieve and the company’s overall vision, then you need to work closely with them to bridge the gap.

Step 4: Add departmental inputs to the AOP

The next step is to collect inputs from each department. Depending on the department, these bottom-up inputs may include: 

• Revenue forecasts
• Departmental budgets or expense estimates
• Headcount plans

Once you’ve collected all the relevant information from the different departments, you need to review the data. The goal here is to make sure all the numbers add up are and are well aligned with the overall company budget and that you’re focusing on the right things to achieve the company’s objectives for the coming year.   

This is also where you would look at different scenarios and rolling forecasts to plan for  contingencies. 

Step 5: Review, reiterate, and reforecast when needed

Once you have your plan, you need to review and finalize it. Planning is always a bit of an iterative process. 

In this last step, you may still need to reconcile some elements of your plan, if during your review, you find discrepancies between the bottom-up inputs and the top-down guidance. This final review helps ensure the consistency of your AOP with the company’s overall vision.

While an AOP does not change once it has been signed off for the year, the forecasts and assumptions in the AOP can be revisited and adjusted to reflect sudden market shifts or other external conditions. 

Factors to consider when drafting an AOP

Here are a few crucial factors to consider when drafting your AOP for the upcoming year:

1. Relevant KPIs per the business stage: It is important to choose and track key performance indicators that align with your business goals and strategies. While these can be influenced by your strategic plan, they need to be specific to your company's current financial stage, product development, and market dynamics. For instance, for an early-stage startup, growth is your biggest KPI. But if you’re a mid-stage startup, your goal might be to strike a better balance between growth and revenue. 
2. SaaS benchmarking: Set achievable outcomes and growth targets for each team by benchmarking with best-in-class industry standards. These benchmarks act like a compass, enabling you to identify opportunities of growth and guiding you to make better business decisions. 
3. Leading and lagging indicators: Leading indicators, such as pipeline coverage ratio, customer acquisition cost (CAC),and customer lifetime value (LTV), help predict future performance outcomes. Lagging indicators, such as churn rates, annual recurring revenue (ARR), and net revenue retention (NRR), offer insights into past outcomes. Incorporating both types of indicators into the AOP will provide a more comprehensive view of performance and help you set targets accordingly for the upcoming year. 
4. Data accuracy: An AOP's success relies on data accuracy. Inconsistent data leads to unreliable forecasts, resulting in missed targets or cash-flow problems. Financial planning and analysis software helps you in consolidating data from different sources into a single platform for easy analysis and strategic decision-making. 

Challenges in creating a comprehensive and effective AOP

While planning and creating an AOP, you might encounter a variety of technical, organizational, and implementational challenges. 

Challenges in the creation process 

Finance teams can be burdened with several technical challenges in the midst of creating the annual operating plan—lack of accurate data being the foremost. Without accurate data, making informed decisions becomes difficult, which can lead to unreliable forecasts. 

Another challenge is setting realistic targets and aligning top-down goals with bottom-up inputs from various teams. Achieving this balance requires close collaboration across departments and is often complicated by cross-functional communication barriers. 

Challenges within the organization 

Organizational challenges are one of the biggest challenges that slow down the AOP creation process, including:

1. Managing expectations and coordinating inputs from different departments

This is the biggest organizational challenge in AOP planning. The different types of data used in an AOP are historical data (perhaps of the last three years), the previous year’s AOP targets vs. the actual performance, along with bottom-up inputs from the teams—aligned with CEO’s and board’s overall objectives for the upcoming year. As a result, tracking, reviewing, and finalizing these inputs from different departments becomes both time-consuming and exhausting. 

For example, different departments may have conflicting targets, such as, the sales team might project higher revenue, while finance aims for conservative forecasts. Hence, the finance team may ask for more details around the sales team’s revenue estimates (based on current team size) for the upcoming year before they both agree on the sales revenue target and budget. In such situations, benchmarks are a good approach in aligning differing perspectives and focusing on achieving business goals. 

2. Identifying and addressing roadblocks

Cross-functional collaboration and KPI alignment can become roadblocks, especially when teams have conflicting goals. It is important to be aware of the “goal post”, otherwise teams will struggle to understand how their KPIs and initiatives can influence the company’s financial health and performance, resulting in delays or misaligned priorities. 

For better alignment and collaboration while developing the AOP, there is usually a kick-off meeting between the CEO/CFO and the department heads. The purpose of this meeting is to give business leaders the opportunity to discuss their vision and strategic goals for the company and ensure that everyone is aligned on the outcomes for the upcoming year.

3. Establishing a repeatable process

As businesses grow, the annual planning process becomes more complex. A repeatable process — complete with a starting point (usually the previous year’s AOP) and a playbook/guide — ensures your teams are more productive and helps to keep the overall AOP planning process on track. 

4. Ensuring comprehensive involvement

A comprehensive AOP requires both top-down vision and guidance (from CXOs and board members) and bottom-up insights (team budgets, targets, and KPIs from department heads). 

An annual operating plan can be successful only when all the stakeholders — CXOs, board members/investors, and department heads — align on the goals and agree that the objectives are reasonable. 

Challenges in implementing the AOP

The other major challenge is the actual implementation of the annual operating plan. Once the AOP is finalized, it cannot be changed. 

However, you can revisit and adjust the forecasts and assumptions that inform core elements of the AOP, such as budgets, objectives and initiatives, to address any sudden shifts in the market, macroeconomic factors, even current business performance. 

This ensures that your business remains agile while staying aligned with its long-term objectives.

How Drivetrain enables finance teams to streamline the AOP process

If your planning process feels overwhelming, it may be time for you to leverage the benefits of SaaS financial planning and analysis (FP&A) software. These tools equip businesses with all the accurate data they need, in one place, to identify opportunities and mitigate risks—for improved business performance and growth.

Creating a solid AOP can be challenging, but it's key to driving business success. With more than 200 integrations, Drivetrain helps consolidate data from disparate sources, such as CRMs and HRIS into a single source of truth. With all your key data in one place, you can slice and dice it per your requirements in real time to generate insightful reports. 

Further, the Drivetrain platform offers advanced scenario planning tools and what-if analysis capabilities to help finance teams to model various outcomes, ensuring that they are prepared for all eventualities.

Drivetrain also streamlines collaboration between departments, making it easier to gather inputs and speed up the AOP planning process. The role-based access control (RBAC) and audit trail features ensure that teams and users can access the data they need for the AOP quickly and easily, without inadvertently making changes to the whole plan or financial model.

‍Find out more about how Drivetrain can help simplify your AOP planning process.