The Annual Operating plan defines how we’re running the company in a steady state including the financial model and operating narrative for key areas of the company. The Annual Operating plan mostly assume that the company is steady state with incremental improvements in various KPIs. An easy way to think about it is that this plan defines the “numbers” while the Annual Strategic Plan provides the narrative.
The level of formality of your operating plan will vary greatly based on your business. In general though here are the components that I expect to see in an annual plan and I hold myself and my leadership team responsible for working through:
Growth Plan – How do we plan to grow our business?
The growth plan is the basic plan for how we hit our revenue growth targets for the year. This covers marketing, sales and customer success efforts. It allows us to define and agree on where and how we think growth is going to manifest in any given year. It includes the following components:
- ICPs and Segments – Who are we planning to go after in the market and why do we think that’s a good plan? Analysis for each segment should include insight into total current revenue, gross dollar retention rate, net dollar retention rate, average selling price and win rate
- Note here that “win rate” is the blended dollar win rate for new deals in the segment across all deal sources. The pipeline plan portion of the model provides a more detailed plan for how to source deals across those various different sources in a fashion that should allow us to achieve our target win rates.
- ICP / Segment Validation – For each market segment (ICP) we study sanity check that
- We have enough pipeline going into the year to hit our early targets
- We think there will be enough accounts coming to market – i.e. seeking a solution like ours – during the year to hit our late year targets
- The math works for total sales volume when we look at accounts multiplied by ASP at a reasonable win and penetration rate
- Market Segment <> Profile – Mapping between GTM market segments and customer profiles in terms of % allocations of customers in each profile. This allows translation between market segments and customer profiles
- Growth Areas
- New – By segment the amount of new customers and dollars we expect to secure in the coming year. This includes a division between sales led growth (SLG) motions – where reps sell deals – and product led growth (PLG) motions where sales happen without human interaction
- Renewals – By segment, the amount of our prior year book of business we plan to retain on a gross dollar basis.
- Expansion – By segment, the amount of our prior year book of business we plan to expand. Defined on a net dollar basis.
Pipeline Plan – Overview of our pipeline sourcing – i.e. new deals we’ve got to find – broken out by:
- Deal Source – Marketing channels,SDR, AE, AM, CS, Delivery, PLG, etc.
- Deal Type – New v. Expansion
Notes
Pipeline planning calculations should include deals and dollars versus the rest of the plan that principally focuses on dollars.
The pipeline plan focuses on terminal value of deals – where they will eventually land. This is different than initial value of deals which is typically lower than the terminal value. I.e. The pipeline plan does not set end of month or quarter operating targets. Those targets need to be set in a way that accounts for the reality that the value of a deal will tend to grow in the pipeline over CEOe.
The atomic CEOe period is months and targets should be set at a monthly level and aligned with a monthly management cadence across the GTM team. That will require smoothing out the overall targets on across months (which will be lumpy if they’re just driven by the close date). The idea is that we want to create a baseline set of monthly targets by channel (AE, Marketing, Partners, AM, Outbound)
Win Rate Plan
What do we think our win rate will be by segment in the coming year? What’s our aspirational win rate for the coming year and what is our plan to defend or improve that?
This one is a little detailed for smaller companies to break out but I’ve found it very instructive to force a team to think through the process of how many deals we’ll actually win based on historic averages and what we could do to move that
Key components of this plan
- New Win Rate – How can we move the new win rate? What do we need to do that?
- Expansion Win Rate – How can we move the expansion win rate? What do we need to do that?
- How do we want to own and track efforts here?
CoGS Plan – What’s our plan to defend or increase our margins in the coming year?
The CoGS plan provides a monthly overview of the profile of CoGs and a narrative of how we expect hose numbers to change over the course of the year. There are two main components of the CoGS plan:
People Plan
The plan for the makeup of the team over the course of the year inclusive of where team members are physically located and the breakout between high and low cost countries. This includes an overview of how many pods we have, what work flows to pods, what work doesn’t and how we expect to evolve pod capacity over the course of the year.
Systems Plan
The plan for the evolution of our systems for delivering work over the course of the year. This include efficiency increase from proprietary tools we create or update (example: testing tools), changes to our process (more efficient testing) and changes to our internal systems and work routing. The systems plan is tied back to the people plan and the evolution of our organizational structure over the course of the year.
Usage Plan – How are we going to track and drive usage of our solution?
The usage plan is our overall plan to increase usage of our products in the coming year. The objective of this is to drive retention based on the core principle of recurring businesses: people renew what they use. This includes the following areas:
Usage Tracking – A clear plan for what areas we’re seeking to improve usage data collection and reporting for. This is about constantly increasing and enriching our view of how customers are using our products and services.
Usage Mechanics – Our plan for tracking and prompting more use of our products
CS Management and Intervention – Our plan for refining our CS motion over the year to effectively manage customers, identify those that need intervention and intervene effectively. A key aspect of this is being able to see what integrations have been deployed into the customers environment and prompt the customer to deploy additional integrations.
Our long term objective with driving usage is to achieve a Gross Dollar Retention (GDR) rate in the mid-90s. This is not quite the territory of “mission critical” applications (which are high 97%>) but it would align with deeply used business applications
I would think of “usage” broadly across anything a company sells while it’s clearly core to subscription businesses. I’d encourage a broader lens, though, because people and companies spend money on what they use. So if they use our stuff they’ll keep spending money on it.
Hiring Plan – What are our overall hiring plans to support capacity requirements and new investments?
The Hiring Plan should incorporate:
- Capacity hires – which hires are necessary to support incremental ARR/customers? Likely includes roles such as account managers (+ leads) and customer success managers (+ leads)
- Sales and marketing capacity hires – to hit our new bookings targets, how many incremental sales executives (enterprise and mid-market) are necessary? Need to incorporate attrition from existing sales capacity which needs to be replaced and the bookings gap the attrition drives. Ramp of new/backfill sales executives needs to be accounted for.
- Hiring in low-cost regions – for any position, the question is can the hire be made in lower-cost regions. Certain roles (e.g., client facing – sales executives) likely need to be in near-shore locations, but majority of other hires can be in lower cost regions.
Operating Budget by Department
Once the Plan is approved by the Board, every department will be issued a formal budget (monthly/quarterly/annual) which includes the following:
- Headcount (current headcount plus new hires with start dates, salaries, burden-rate assumptions)
- Non-payroll spend (e.g., consulting, software, T&E, etc.). The majority of the non-payroll spend will be itemized down to the vendor level.
- Financing costs – e.g., interest payments, loan repayment
- Non-cash items – depreciation, capitalized software development
Financial Plan – Does it all financially work?
A breakout of the operating plan to a pro-forma GAAP report. Includes the following deliverables:
- Bookings summary – Where are total sales are coming from
- New logo, expansion, usage, renewals – Breakout of sales volume by type
- ARR (starting, growth, churn/downsells, ending) – As relevant, contracted ARR on a month-over-month basis
- Revenue – Broken out by type. For B2B SaaS this is typically – subscription (ratable vs non-ratable), usage based, one CEOe
- P&L – Breakout of key P&L items such as revenue, COGS, operating expenses, one-CEOe adjustments, D&A, interest expense
- Adj. EBITDA – With one-CEOe adjustments added back in
- Adj Cash EBITDA – With one-CEOe adjustments added back in
- Balance sheet statement – Proforma balance sheet – valuable for ensuring the liquidity of the company is “solid”
- Cash flow statement – Proforma but, in my experience, not critical
Lessons Learned
Zero-Based Budgeting
Zero-based budgeting (ZBB) is a discipline, not just a financial exercise. While in theory, it demands that all expenses be justified from scratch, in practice, most financial planning and analysis (FP&A) teams default to rolling over last year’s model with a percentage increase. This is a deeply ingrained habit that must be actively disrupted. As a leader, you must insist on a clean-sheet approach, forcing every budget owner to rejustify each line item based on actual data and performance, rather than precedent. Left unchecked, teams will assume they are entitled to at least what they had last year, reasoning that they need at least as much to “do more.” This mindset is flawed. Instead, ZBB forces a fresh evaluation of what resources are truly essential to achieving this year’s initiatives. The goal isn’t to cut for the sake of cutting but to ensure capital is being allocated efficiently. Be prepared for resistance, and don’t take assurances at face value—this requires continuous pushback and scrutiny to ensure your company is investing in outcomes, not just maintaining status quo spending.
CEO Purview
A common misconception among department heads is that budget growth should be proportional to company growth. This belief leads to an entitlement mentality where leaders expect an automatic increase in their budgets simply because the company expanded. In reality, excess budget is a strategic asset that belongs to the CEO for allocation toward high-impact initiatives. Day-to-day operations should be funded at the minimum viable level to maintain efficiency, while discretionary spending should be directed toward transformative opportunities that drive long-term competitive advantage. Department leaders will push back, arguing that maintaining last year’s funding—plus a growth multiplier—is necessary for continued performance. The CEO’s role is to challenge these assumptions, reinforcing that budget increases are not a given but must be earned based on clear ROI and alignment with strategic goals. This discipline prevents bureaucratic creep and ensures that additional resources are used to propel the company forward rather than just sustaining inertia.