In this episode, our host and Summit’s Virtual CFO, Tom Wadelton, and Adam Hale, Partner at Anders CPAs + Advisors, discuss the annual planning process, why your clients need an annual plan, the best time to create a plan, and how you can develop a customized plan for each client.
“We're not talking about the forecasting meeting. We're talking about an annual planning meeting where we hit the brakes and see what last year looked like. Then we evaluate what the current year-to-date looks like and realign on big-picture goals as needed”– Adam Hale
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What You Need to Know About Annual Planning
Tom: Welcome to today's episode. Adam and I are gonna be having this conversation today, and a very timely topic is around the annual planning process. Many businesses do this, some actually don't do it at all, but what we want to talk about is kind of initially the importance, but then steps you could go through.
[00:00:35] It's an area that's really important to businesses, but I think also an area that a CPA and someone acting in the CFO capacity can really make a big difference for. So, Adam, a couple things I think of when you do an annual plan, you're setting targets, you're setting financial targets, and then some operational targets, and it gets a chance for the business to align around those topics.
[00:00:54] Any other thoughts on kind of why, if you had a client saying, ‘Hey, why would I even do an annual plan,’ what you might tell?
[00:01:01] Adam: I think less probably push back from the client. I assume we couldn't get another person to join us now because everybody's doing their annual plan.
[00:01:09] I mean, really no pushback from the client. I think clients love planning meetings. They really do. The thing I think for us, is, whenever it comes to tax planning. So hopefully if you are running a tax practice or you're working with clients that are working with an outside party to do taxes this time of year, you know, whenever you hit Q4, you should really be doing some advanced tax planning.
[00:01:32] You know, getting their information, figuring that kind of stuff out. And the reason being is because there's a deadline. You know, we all have to pay income taxes. Some more than others. I guess. Some people try to avoid the taxes , but nonetheless, there's a physical delivery that needs to be done by a deadline imposed by the federal government.
[00:01:49] Whenever it comes to doing that same kind of exercise for your business, though, there really isn't a deadline. I think, for the most part, most businesses are on a calendar year, and if they're non-profits and they're off the cycle of a calendar year, that is a very normal part of their business because they have a board.
[00:02:05] So they kind of have a deadline and a deliverable. And again, they're working with a budget, not really a forecast. We call the budget the plan because, like any good plan, it changes as soon as the next day starts, and it all of a sudden becomes a living, breathing thing. So again, not really pushback from the client.
[00:02:22] I think that if you're not careful, what ends up happening whenever you pick up a client, you do a lot of really good planning work up front whenever you're onboarding a client, and then, all of a sudden, whenever you start working with them, month over month, you'll be six months or a year into the relationship, and you haven't really rebooted the plan.
You allow it to just become evergreen, and you're always maybe recasting out, but what we're talking about right here is an opportunity just to hit pause and quit pushing it out a couple extra months. The logic might all be great. But this annual planning meeting and thought process is really your opportunity to just kind of lift out and re-strategize for the next three to five years, not just a rolling 12 months.
I think a lot of times, we even find ourselves kind of getting caught up in that day to day. Would you agree, Tom?
[00:03:15] Tom: I do. And especially when you talk about the reset. Most of my clients, I feel like when we talk about the annual plan, I'm pretty aligned with what their next year is gonna look like because I understand their long-term goals.
[00:03:23] I had a client recently that threw a 90-degree turn at me when we started talking about next year. It was, ‘Hey, well I wanna make sure I know how much I can invest in developing a product.’
It was the first time I'd ever heard him talk about that.
[00:03:39] He works in the agency world. He thinks he's learning enough about agencies that he can develop a product to sell, and he wants to funnel a portion of his profits for doing that. Perfect. Wouldn't it be interesting if we didn't have a good plan and we get halfway through the year and he's really frustrated, he's making no progress, working toward a goal that I don't even know what he's shooting toward? And so kind of that chance to align to that seems really valuable.
[00:04:01] Adam: Yeah, definitely on the big-picture stuff. Again, just to kind of make that differentiation of what we're talking about, we're talking about a separate meeting outside of your normal cadence stuff.
[00:04:14] We're not talking about the forecasting meeting. We're talking about an annual planning meeting where we're just gonna hit the brakes, do a post mortem on what last year looked like, and then evaluate what the current year to date looks like and then realign on big-picture goals.
To Tom's point, like: Hey, are we still heading this direction? Or do we wanna go this way? Or, what other things do we want to do now that we know a little bit more about ourselves? Now that the economy's kind of working itself out, good, bad, whatever, it doesn't really matter. What do we know about ourselves today? What do we wanna change going forward, if anything? And, let's reassess and go through the exercise as if I just picked up a brand new client because that is a really powerful alignment meeting to have.
[00:05:01] Tom: I agree. And, to your point, if you're saying, ‘are we still going in this direction?’ Some of them, I found some of my owners are very aspirational in their targets, Right? ‘I wanna grow a huge amount next year,’ so we can model some different scenarios. Say they want to grow 50% in revenue.
[00:05:14] Okay. So that would look like you'd have this many additional team members. This is where you’re gonna grow. You've got maybe three different business lines. Which ones are you gonna grow? And then, the real conversation, can you actually get that amount of work, and what would that take? And so that could have them saying, ‘what is it you have to beef up to try to really increase that top line by that much?’
[00:05:32] But as we model those things, it becomes pretty easy initially to say, ‘Well here's three different ways you could do that.’ And they can look at it and go, ‘I don't like that. Let's change these kinds of things about it.’
Which is really cool. Others are more, ‘Well, we just want to continue our existing forecast, so if I keep my same team in place, what does that look like?’
[00:05:48] But maybe they weren't as profitable this year as what they should have been. So then your model could be more, ‘Here's where we want to cut some additional cost. If you're gonna be the same size at the top line, where are we gonna try and cut? And can you actually do that? What are we gonna target?’
[00:06:00] And those kinds of things, that kind of goal setting, that becomes really important for what they're doing.
[00:06:06] Adam: Yeah. I know it sounds or seems like a big lift because we do like onboarding. We say it's a meeting, but sometimes it's a series of meetings. How long does it usually take you to kind of get through the annual plan?
[00:06:18] Tom: Calendar wise, I usually use about the fourth quarter. I will introduce it in October. For some of my clients who are in a, ‘we're just kind of continuing where we are,’ that's a pretty easy piece. The one client I just mentioned who I said did the 90-degree turn on me, that's gonna be a little bit longer.
[00:06:32] I'm anticipating three or four models. What I tell them is that where I'd like to be is in mid-December, they feel like they've got this plan that they can kind of laminate. That's the one that's locked in that all next year, we're gonna compare to that plan. And so, I've really pushed them and said, ‘Let's get that done in December and not continue looking at all these models.’
[00:06:49] If you're mid-February, it feels a little bit funny to say we're still working on a plan for the year. Right? I've got my mix of clients, some that when I am sitting here like reviewing, say August results, I'm saying this was our plan.
[00:07:04] Some are l totally locked in. ‘Yep, I remember that plan.’ I do have a few clients who are like, ‘I'm not sure I bought into that plan. I thought I had a different one in mind.’ And those are not very fun conversations where they didn't buy.
[00:07:15] Adam: Well, you're right. So a couple points there just on that last one though is, making sure that they buy in
[00:07:24] It is really important, and make sure that it's a collaborative piece, which is why I think it takes longer than just a meeting. So, if you show up and you're just like, ‘Hey, this is what we've done, this is what I think we're gonna do in the future; any changes? We're out.’ That's usually not very productive.
[00:07:39] So I agree with you. In the past, what I would do is stagger my clients because you'd have a lot of clients going through this; some you'd do and you'd talk in September or October. Others, it’s October, November, December. And then what I noticed is, if you start this conversation in November or December, it's gonna be January, February before you really cement the plan.
[00:08:01] Yes. And then, did you really for the full year, whenever you actually knew the results for January and February at that point? Something about it just feels really weird, and I don't think that it's the best client experience.
[00:08:16] So you're saying about three months to give yourself plenty of buffer? Because a lot of times, leadership teams need to, just like a board of a non-profit, they need to kind of look at it and let it settle for a little bit before they decide on it. Maybe you're doing more complex things like figuring out raises for next year, price increases.
[00:08:35] Those spill into bigger conversations. So leave yourself about three months. I start definitely by October. I found, even in September, just start the conversation so that in October, you're hitting the ground running; you have to remember that November and December are big holiday months.
[00:08:53] Not only do you have the holidays, but we have a lot of vacations, and then, all of a sudden, trying to get people on the same page and people to like get their head in the game is, at least from my experience, has always been a little tough.
[00:09:07] Tom: So I mentioned three months, but it probably ends up being about five meetings total. I've got my once-per-month forecast meeting. And during that meeting, the majority during those three months is probably on the 2023 plan. We're looking at how we're gonna finish out the year, but we're focusing, and depending on if they want extra models, there might be one or two more meetings that we have to say, ‘Okay, you wanted these other two versions thrown in there.’
[00:09:29] It probably makes sense to talk about some of the tools that we have. And so, we have our forecasting tool where we've talked about Giraffe and we've talked about PlanGuru. Those are great. Sometimes when you do modeling, you end up going with a little bit simpler tool. We have our scaling document that we use, but even if you did that in Excel where you might say, ‘Hey, I can do this really rough model for you.’
[00:09:48] If you wanna just do a quick and dirty, ‘what would 50% look like and what would some other things, throwing a raise, things like that look like?’
And I can give you a rough number. That might be the better way to do it, to have narrowed my models down from four down to two, and then I might plug it into something like Giraffe.
[00:10:03] Have you found the same thing that you often go to? A little bit more flexible, simple model to show them?
[00:10:09] Adam: Well, yeah, because the thing is, whenever you're in the forecasting tool, there's a lot of moving parts, right? Your whole chart of accounts are in there. You're looking at months.
[00:10:20] It's really easy to get kind of buried. The other thing is, whenever you're in the forecasting tool, you're not necessarily seeing the big-picture KPIs that are driving everything. Of course, you're seeing revenue and you're seeing net income. I know you touched on the scaling doc that we use, which is basically like a G sheet, right?
So before anybody thinks it's like something super fancy, it's not. It's just a G sheet. It's a template that we used, and we created a lot of automation around it so that it connects to the forecast, and it does a lot of that thing.
[00:10:50] But basically, what that is, is a summarized view in kind of a singular landscape where the client can sandbox because that's really the most important thing. Not that you can't let them sandbox inside of Giraffe or PlanGuru or something like that. But getting them to navigate it and understand it is super difficult.
[00:11:10] And again, if you're calling out certain KPIs–so, for example, we'll just use a service-based business. In this example, we have all their data and metrics up at the top summarized of this G sheet so they can see all this stuff, and they can see all of the key performance indicators that we think are important for their business.
And then, they have a really consolidated income statement that just shows them top line gross profit and in a couple lumped, like admin, marketing facilities, that come in there. And then, net income. And then we've got the net percentage in big, huge, bold letters sitting on top of that income statement.
[00:11:47] Because we're always telling them, ‘Hey, shoot for 20 to 25%.’ You're naturally gonna have a little bit of a fall off. Service-based businesses, that kind of a thing. But the cool thing is, as we make it dynamic, so that as they're changing people or they're changing roles, or their average bill rate, or how much they're gonna write stuff down or.
[00:12:09] the amount that a role is going to do in billable hours, or any of those kinds of things, or revenue per headcount, whatever it is, they can, in real time with each keystroke, they can see the impact to that net income percentage. Then they can see the impact on those metrics.
[00:12:27] And we give them floor metrics. I would say, ‘Utilization can't be below this floor. You can't go below this, this, and this. Here's your parameters. Go to town. Sleep on it, talk to leadership, sandbox the hell out of that thing. Next time we meet, let's go through it and kind of see what you did.’
[00:12:46] Whenever we say three months, to your point, Tom, you're thinking, probably three to five meetings, right? Is what you're probably really working on, and you're building a tool that is architected by you, is very simplistic to go through and understand what they're changing and how they're changing it.
[00:13:07] They can do a lot of the work behind the scenes in between meetings fighting things out with sales people or operations folks to determine, ‘Tom told me I can't go below this and I can't go below that.’ They'll work out the logistics of what that looks like.
[00:13:24] And then, whenever you meet back, that's whenever you can big-picture iterate on it. That's on the big metrics, and then we break stuff down for even just the budgetary items on the opex side. We show them, ‘this is what our plan is.’ Any kind of adjustments there is, what it'll look like at the end, so we can show them a before and after scenario on the scaling dock side by side.
[00:13:49] Tom: I think the non KPI, the non-financial metrics, are a really valuable part of that. As you mentioned, we're in a service-based business, so a lot of it's based on how many hours are gonna be billed and what's your rate. What's really cool, and I think you could build this for any different company, a very common question is, ‘What if I charge more per hour?’
So in the tool you can do that, if your average bill rate is $150 an hour, what if I can go up to $175? Let's make it a big increase. Okay, so your profitability goes up a lot. Then that begs a good question. Can you really do that? How would you get that much of an increase?
[00:14:23] And you may get the sales guys in there. ‘Well, we can't quite get that much.’ So they start toning that down. What if I work people harder? If I work people 30 hours billable per week. What if they go up to, let's say 40, another really big increase? Okay, profitability jumps. Then you say, Can you really push your team that hard?
[00:14:37] They put in a lot of admin hours. What do you have to do to get those kinds of things done? But that's the part that I love, that is simple enough that many of the owners, either we’re on the screen doing it with them, or they actually wanna play within themselves, and they add people and take people away and get to a place of going, Yeah, this is what I can live with. Then, they can turn into a detailed plan for the year.
[00:14:56] Adam: I think what's fun sometimes is, you know, they're trying to get to a certain number for you. So then they add like 10 people. And you're like, ‘Okay.’ And then you show them that revenue number and see what that equates to monthly.
[00:15:09] Because we have a monthly view. And I'm like, ‘So, so you're ready to do a million a month, huh?’ Then, down at the bottom, you give them a quick and dirty, like, ‘this is how big your pipeline will need to be to support a million dollar a month.’ You know, sales cycle and then, how's that sitting?
[00:15:23] And sometimes the owner is the BD person. So how's that sitting with you? They say, That seems like a terrible idea. And I'm like, I agree. That seems a little ambitious. Good luck to you if you can do it; that's fantastic. But that seems a little far-fetched.
[00:15:40] Then you go back to the drawing board. And, here's where your facilitation becomes really, really important. By the touch of a keystroke, the client has the ability to manipulate this thing and get the plan in place, which is very powerful.
[00:16:00] What you have to do is then come back, just like on the sales side, like changing hours, and ask, ‘what are you fundamentally going to change?’
You said, Tom is only working 10 billable hours in this example.’ Easy, I figured it out. Tom's gonna work 25 billable hours.’
[00:16:19] ‘Okay. So what in your delivery is going to change, not just communicating to Tom that his hours are gonna go from 10 to 25. But what in your delivery is gonna change? What in your sales process is gonna change? So, this is where you have to push back on the client and really gives you an opportunity to flex the advisory side of it and not just the tool side.
[00:16:38] Because they're like, ‘well hell, I built this thing.’ And it's like, ‘well sure but what I'm telling you is, I looked back and Tom has never billed over eight billable hours a week. So how are you gonna get him to 25?’
And they say, ‘I'm just gonna ask him to do more.’
‘Okay. Is it in the contract that you can bill for his type of service?’
[00:16:56] ‘Well, no.’
‘Okay, well then how's that gonna happen?’
So you can push back and have a lot of these conversations with the client. And I know we're using a service-based model here because this is what we're used to, but you can use this with any client.
[00:17:15] Tom: One client that you and I have worked on together does manufacturing and sells lots of products. And I had almost a whole year where he was selling a product basically at a loss or near a loss, but it was his big volume.
[00:17:30] And I was like, You're killing yourself; you're sitting at such a low margin before I'd even added labor to this.’ And he would argue. We had this simple model where we showed, what if you change your price and volume on these things? And in that discussion, we had a really good one where he started moving himself toward the higher margin product saying, ‘I'm gonna sell a lot more of the higher margin stuff, and I'm gonna do less.’
[00:17:47] But the model sort of showed, you can sell twice as much of the low margin and do very little. And what I found really interesting, and I mean he's the one who did it, but he's really changed his business pretty significantly, where he's turned down a lot and he started saying things like, ‘Yeah, I could never turn down a sale. They wanted to buy X thousands of pounds, and so I just sell it to them.’
[00:18:01] And now he says ‘no.’ He's like, ‘No, I saw the higher margin.’ But I do think it was that exercise, right? On the screen you're changing things. And he would see, and there, to your point, I'm like, Can you really sell it at that price?
[00:18:15] He's like, No, I could never sell it that much. So that's where you're like, Yeah, let's take it back outta the model. Let's not put in the impossible.
[00:18:23] Adam: Well, and sometimes too, I think that revenue can be such a vanity metric. That people don't really consider or think about the impact. And, I know especially in construction and in manufacturing people are always like, ‘Well as long as I push, the bottom will fall.’
But to your point, hell, if you're losing money right on the actual product itself and you could be better served somewhere else and you're not using all that equipment and doing all that kind of stuff, it becomes really important to just kind of take inventory of that.
[00:18:51] And whenever you can visualize that on a consolidated income statement, like, let's just change this, how does that impact my bottom line? Oh, actually, by losing $2 million in revenue, I didn't change my bottom line at all. You know what I mean? Now that begs the question, now you got all these people that were producing this $2 million of revenue you know, where are they being repurposed?
[00:19:19] What could they be doing? Or, do you get rid of them? Because if you get rid of them, all of a sudden there is an impact. You are more profitable. So you can build a smaller house.
So, just walking through this annual planning meeting just like you do, I assume that everybody's probably doing something very similar to this whenever they onboard the client?
[00:19:38] The bigger takeaway here is just making sure that you're doing this annually for your client and taking the time to go through this exercise. Because the other thing is, you're making a lot of assumptions whenever you pick up the client.
And Tom, because I know this client that you're referring to, I'm sure the story that he told you and the support he gave you for it was probably completely different than what actually was happening. And now, armed with a year or two years’ worth of data, however long you're in this relationship, you can look back and go, ‘Okay, I hear what you're saying, but this is the reality. You lose a lot more than you win.’
And so, again, it just kind of depends. I'm not saying that always means you're cutting out a service line, right? But maybe there's a way to change the product mix to be a little bit more bullish on your pricing, those kinds of things.
[00:20:31] Tom: I really love one of the points that you made, Adam, around the top-line focus. When people are seeing it on that kind of model to say, ‘Okay, I've shown you that you can make more.’ It's really easy to then say, ‘Do you really care if you can say you sold 10 million top line versus 8 million, if the bottom line means you're putting $500,000 more in the bank at the end of the year?’ It's pretty hard for an owner to say, ‘No, what I really care about is having that top line. I don't really care about the cash.’ Right?
So showing them that in a model, I think, is a really easy way to say, ‘Look how much better it gets when you focus on some of the more profitable things that you have?’
[00:21:01] Adam: I think it's even more than that, I think there's misunderstanding; you know, pennies cover dollars all the time. It's covering something somewhere else. It's covering my salary or it's covering overhead and I need this. And the only way to prove that out is by doing this consolidated annual planning meeting where you're really digging into those revenue metrics and you're playing that out and showing them in real time, ‘Hey, you take control of the spreadsheet. You change that from 15 cents to 12 cents, or you do this discount, or you delete that line item.’ Then they can kind of see it and they're like, ‘Oh, so you mean I didn't need to keep that customer happy for $3 million?’
[00:21:47] ‘Of which I was paying for the privilege to do business with them.’ Probably not. Like, Yeah. See if you can get somebody else to do that. There are situations where you have to bring on a loss leader in order to get the high margin stuff, but those are all great conversations and strategic meetings that you're having with your clients where you're talking through.
[00:22:07] ‘Okay. Explain to me why you have to do that. Why does 20% of your revenue have to be at no profit in order to get the other stuff?’
And maybe that's part of it. But it just enhances our strategic ability to guide the client.
[00:22:21] Tom: Yeah, I agree. So another place we could probably click on then is, so then once you've said,’ Okay, this is my annual plan,’ and let's say it's a high growth year or a significant change from what I'm doing currently, then I think the double click that can be really good is start looking at the timing of when things are gonna happen and then maybe certain functions.
[00:23:15] So I had a client that wanted to grow, I think 25% this year. So then, you know, you go from one, say it's now, I'll get the math wrong, but I think we were going from like 18 million to say 25 million in revenue. So then you're starting to say, Well, what does that mean month by month? we're not gonna suddenly jump to two-point-something million dollars every single month starting in January.
[00:23:33] So how does that build? And that was pretty interesting to look at them and say, ‘Wow, by the end of the year we're sitting at twice as big of sales per month as what we have currently, because we're all working our way toward that number. And there was a pretty good sort of gut check for them to say, Man. To your point that you made earlier, the pipeline's bigger, the production team's bigger, all these things to get ourselves to a really high run rate.
[00:23:53] And that was probably the second or third meeting around. Okay, we modeled it out. What would 25 million look like in total? And, now, on a timing basis, what does it look like? And so I thought that part was kind of fun to go through and work with them. And then you've got clicks, then, when are you gonna add team members and what kind of roles and things like that.
[00:24:11] Adam: Right. All the blocking and tackling. I think that's a good point; we were talking about the summarized view and then how do you bring that into more of a tactical plan and back cast? Basically what you're doing at that point, the book ends, looking where you are today and where you wanna be, and then you kind of back cast through that and you look to see if that's reasonable?
[00:24:31] Can you pick up 15 clients a month? For every single month? And have a team to support that kind of a lift or whatever that looks like? And then, again, if that doesn't look reasonable, maybe your plan stretches out.
[00:24:49] Then you can look at metrics on revenue per head. When do I need to hire for these different roles? So you can have some placeholders in there so the model's telling you when you need to have all these people hired, and then you can talk about onboarding employees and they need to start a month before the revenue, whatever, right?
[00:25:08] But you can have a pretty dynamic model that explains all that. I know for our own purposes at Summit, I can tell you for the next five years, by month, all those metrics–what our churn is, how many clients we're gonna pick up per month, what the average client's gonna look like.
[00:25:25] I know when I'm supposed to hire a CFO, when I'm supposed to hire a senior accountant, I can do all those things now. Are they exact? No. But you know, will they happen exactly in that fashion? Absolutely not. But as part of the forecasting meeting each month we can close the books.
[00:25:44] Were we on target? Yes or no? Now, I've got some really good context for it. Move forward, keep adjusting the forecast to what we think the reality is. And then, whenever it comes time to do that next annual planning meeting in October, you can look at ‘how's our year-to-date performance through September compared to forecast?
[00:26:05] And maybe there's not a whole lot of differentiation there because you're in real time and know what things are looking like and you're making shifts and adjustments and stuff. What does it also look like compared to the plan? Because at the beginning of the year, we thought your client was gonna grow 15 million to 25 million or 18 to 25, whatever that number was.
[00:26:21] And now you're like, ‘Okay, so we really went from like 18 million to 20 million. Yeah. What was wrong about our original assumptions? Let's sober ourselves with that a little bit whenever we're trying to build out the next year's annual plan.
[00:26:42] Tom: Well, and I'm thinking, the position you're in when you have that people plan built as one of the owners because I'm sure we come to you all the time saying, ‘Adam, we need to hire all these areas.’ People think they're busy in doing that, so you've gotta plan to reference and say, ‘Yep, that's about what I thought we were doing.’
[00:26:54] It seems like we're at that point or no? I was saying that I thought we had the right size at this. Let's look closer and say what our metrics tell me. But I think that keeps it from every single one being like this one-off decision where you're like, ‘Do I think I need a CFO now or do I think I need a senior accountant?’ Versus I've got a plan that says this is what we should be marching toward.
[00:27:13] Adam: You're right. The people pain always comes before the financial need. You know? Generally speaking, you're not gonna stretch people and then people go, ‘Oh, you hired somebody new.’
[00:27:25] You know what I mean? It's gonna be like, ‘Hey, you need to hire somebody because we all feel busy; we're underwater.’ You know what I mean? But the other thing is, you have lead time to get the person up and ready. So you have to factor that into it.
[00:27:39] Then, you have to have a bench for turnover. You have to factor that into it. And then, you also have to figure out how long it takes you to actually hire the employee. You have to take all those things into account so you build the bench in that timeframe up front if you can afford to absorb that hit at the beginning just to kind of get rid of most of the variables going forward.
[00:27:54] But typically, Tom, if you came to me and you said, ‘Man, we really need a senior accountant.’ Josh has already got applications out there. He's already halfway through the interview process; we get it.
[00:28:13] It's just this kind of cycle. And so, again, not everything comes out to the exact timing that you put it. But it's really nice, to your point, to have that reference point to be able to go, ‘Yeah, this makes sense, and the financials are telling me it's okay to hire.’
[00:28:29] Because that's, a lot of times, what clients are gonna come back to you, whether or not they really understand all that full logic of what you built in there. They know you understand it. Right? So whenever they come to you, you don't have to second guess yourself. You can go right to the plan, and then you can do a real quick double check like, ‘Well, did we pick up $800,000 worth of revenue because that's what I said we would need in order to hire somebody. You're only at 300? Timeout. What's going on?’
‘Oh, well we lost an A team member.’ Well, replacement hires, that's always like a given, right? But then, if it's $300,000, talk to me about what's changing with your services.
[00:29:09] What's changing in the model? Is there somebody that's struggling? You know, let's talk about efficiency. We can go ahead and solve for this now if we need to. And we can figure that out. I can plug it in the plan and let you know what that impact is. But I think we need to have some broader conversations about why we needed somebody at 300,000 instead of 800,000.
[00:29:27] And we do that exercise on a regular basis. That's when those kinds of conversations come up. That's a common thing where I'm like, ‘Okay, talk to me about why we need more people.’
[00:29:42] Tom: Yeah, I agree completely. The other place that is natural is to then look at like a sales plan, right?
[00:29:48] If you're growing quickly, what do you have to be selling each month to get that done so that you can compare to that? Because when you fall behind, as you know, sales falls behind and then months later you find it. So, can you find that pretty early? And, you mentioned really early in this discussion that
size of the pipeline. So how big should that pipeline be? And if we're trying to grow to where, what I said in this one client was, they're gonna be twice as big at the end of the year, month-by-month revenue. Well, the pipeline has to be huge. And they're saying, ‘Okay, I want to go to a different type of customer. I'm moving more toward enterprise-type customers.’
[00:30:15] Those take longer to get. How big does your pipeline need to be to try to get these, you know, 3, 4, 5 month selling cycles, versus some of the smaller ones you're able to get maybe in a month today?
[00:30:28] Adam: A lot of times, the owner is either the salesperson or really close on the sales side.
[00:30:38] Whenever you throw it at him, you're like, ‘Cool, we got a great plan. Here you go, sales team.’ They're just like, ‘What?’ So, I think that's one of the places where I think operations and finance, generally, they might be at odds sometimes, and it's really easy to kind of sync them up through the financial forecast.
[00:31:00] But, I think the last missing piece, to your point, is on the sales side. And I think that's where, if you're doing a good job advising and making sure everybody's adopting this plan, they understand the plan because that's important, too. And that's the reason why you're using these non-financial numbers.
[00:31:17] Because if I just tell a salesperson, do $400,000. Okay. What does that mean? What I mean is, I need you to pick up three of these clients. Six of these at an average of this. And your profit margins here, and this is what you have to accumulate. Okay, cool. I heard you. And then the salesperson might all of a sudden pick up the mic and say, but, Tom, that means on an operational side, you can't give me blow back whenever I bring this, this, and this.’
[00:31:36]. ‘And you can't tell me we can't start for three months and we can't do this.’ And then all of a sudden the operations person's on their heels a little bit and they're like, ‘Okay, well then that means if I hear what you're saying, you wanna bring me all this stuff and you don't want to hear me say no.
[00:31:58] So then they come back to finance, Here's the circle. In order to solve it, I need three more people. I'll just share our own experience because this happens with us. Our biggest bottleneck is onboarding clients because that is a big, huge lift. On paper, whenever I see CFOs have a lot of bench, I'm like, ‘Okay, cool.’
[00:32:21] I have enough bench that X amount of team members should be able to pick up X amount of revenue. Well, that's true. Unless I have most of my bench and two or three CFOs and they've just onboarded two or three new clients. You know? And then, they don't have the ability. So when Jody goes out or I sell something, and we've got new clients coming in, people are like, ‘Oh, cool. Well, I'm looking at the bench, I've got plenty of bandwidth with the team, and I've got it spread across three people. Let's pick these two clients up next week.’
Everybody's like, ‘Well, but Tom is going through three onboardings right now, and this person's going through three onboardings, and this person's going through 3 onboardings and everybody else is full.’
[00:33:06] So whenever we're looking at our five-year forecast, and I'm seeing numbers like picking up 5, 6, 8, 10 clients a month in our model, the first place my head goes is, Where's my bottleneck? And I know it's onboarding. And so I'm like,’ Okay, let's reassess what the bench looks like.’
[00:33:21] Let's do those kinds of things. So I'm used to doing that kind of exercise for myself. So whenever I'm working with clients, where's the bottleneck? Where's this not gonna happen? And this annual planning meeting really is a great opportunity to bring the sales team to push back on the operations operations, to push back on finance, and have a really productive, collaborative conversation about, let's keep it on paper. How do we make this whole thing work out?
[00:33:49] Tom: I agree. You know, I wondered in the last five minutes or so, I'm guessing that some of the people watching are like, ‘Yeah, Tom and Adam, that's fine. You guys have four, five touches a month with these clients. You're a virtual CFO; you've got all the time to do this.’
[00:34:03] I may not meet with them quite as frequently. What can I do? I've got a couple thoughts, and we've got some suggestions for what people could do. One initial thought is, especially if you're a small business owner, you've done a lot of what Adam's talked about for yourself; you're good at asking the questions, right?
[00:34:18] So you might be telling a client, ‘Hey, I'm not gonna go through and do all the activities that maybe we just talked about. I can have a couple meetings and prepare a simple model for you, and in those meetings, ask you a bunch of these questions where you're saying, ‘Hey, what you need to figure out is, ‘what does this mean for your sales team?’
[00:34:34] Do they have the capacity? The kind of questions we ask, and posing for them to answer those kinds of things where, maybe it's not you running all the analysis if you feel like you don't have the time or a client won't pay for that. Do you think of other things where someone's like, ‘I've got limited time and touch, but I do wanna offer some annual planning resources to a client.’
[00:34:54] Adam: I think the mistake that a lot of firms will make is wanting to carve this out as its own thing and once a year, I'm gonna just charge you $10,000 for it. It's really hard to sell the value of that exercise until somebody's been through it.
[00:35:09] Especially if they're already meeting with you, and they already have a plan in place. So think about that and bake that into the front end of your engagement–like that's already kind of baked in. I don't know that it requires a big extra lift because if they're in one of our smaller services, I'm framing it, but I'm giving it to them.
[00:35:28] They're doing the majority of the work in between meetings. Your value is really gut checking it. And going and pushing back like, ‘I hear what you're saying, but I don't think BD can handle that. I hear what you're saying, but you're always telling me operations can't deliver.’ You know what I mean?
[00:35:43] So you're the facilitator. And again, you're the guide. You don't have to meet with the sales team separately or the production team separately and go marching through the halls trying to figure all this stuff out. I don't know that I would advocate for, again, I know a lot of firms out there charge a client $2,000 a month or $4,000 a month, and then they do a lot of out-of-scope work.
To me, this isn't outta scope, and it shouldn't be outta scope. This should be part of the plan. So whenever you're building out, you know, whenever we do tax planning for clients, we don't bill that separately.
[00:36:19] That's in your fee. You're gonna pay me $5,000 or $10,000 to do your tax work, and that includes your quarterly touch or in an annual tax planning meeting, or whatever that looks like. You would do the exact same thing with this. And you explain the value of that at the beginning, and if you break it into weekly payments or monthly payments and you spread that $10,000 or 15,000, whatever you were gonna charge over that timeframe.
[00:36:45] It's pretty insignificant to the entire thing. And the client definitely sees the value. And feels the value.
[00:36:50] Tom: Yeah, that's a good point. And I don't think I was giving as much credit to the amount of knowledge we already have from doing things like financial statement reviews with them. Right? So it maybe it is, ‘Hey, next year when we said, Okay, all these people are gonna be more billable, if throughout the year low utilization has been kind of a theme, that's a natural thing to be challenging them.’
[00:37:09] ‘Okay. All year we haven't hit the utilization targets. And you said you're increasing them for next year is gonna get you where we're gonna get. And you asked one of the questions early on, like, what's gonna be different?’ That's a perfect time to say, ‘Okay, what's gonna change because we haven't hit it and now you're increasing it.’
[00:37:22] Or, for other parts of the business where you do have background and then having a good plan also helps you during the year to say, ‘How are we doing compared to what we said? What tweaks do we need to make because we continue falling short? Maybe on the revenue side, what should we be doing differently in that area?’
[00:37:38] Adam: Yeah. So frame out an easy tool that you can use. I mean, keep it simple and you already have all the hard work done. It should be all the stuff that you've already planned out in their forecast. So really, it's just logic testing and goal setting. Pushing back and asking the client to spend a little time thinking about how they're gonna do things differently.
[00:37:58] Or, more the same if they're doing great; whatever that looks like. But, it's pretty simple. I mean, it's very important, which is why we spent so much time on it. And, there are some moving pieces that make you a better advisor for sure. But, I definitely don't wanna make it sound like it's this enormous lift that nobody has time for, especially if you're cranking out individual tax returns for the 10-15 deadline.
[00:38:25] Tom: You mentioned tax service; if you think of a way to try to make yourself sticky with the client, have that strategic conversation or annual plan and have them feel like that you really understand their business.
[00:38:37] ‘You've gone a long time to try to get that done.’ One resource I thought of is if people are like, ‘Okay, I'm not sure I know exactly like questions to ask’ or things like that, the Pinnacle Business Guides has something called the Strategic Vision and Execution Plan. It's a pretty good resource.
[00:38:53] It talks about what are your goals, your core business, your values. Those kinds of questions can be good. If you were talking to someone about next year and you get a feeling that the owner really has no idea, I think those can be some good things to poke around different things to see if you do get some kind of a hook into, ‘well, I did have a three-year plan to sell the business.’
[00:39:14] ‘Okay, well what would it look like if you were to sell it for the amount of money you want to get?’ Or things like that. So, some of those kinds of guides can help you with the kind of questions you might want to ask.
[00:39:23] Adam: Yeah, it's a great resource. Absolutely.
[00:39:25] Tom: So hopefully this'll be helpful for people. I think for CPAs serving their clients, this annual planning process is really an important thing to have done, and I think it'll pay benefits throughout the entire year for people. And hopefully this is helpful, the information you and I have shared.
[00:39:39] Adam: My only pushback is, don't make this a standalone one-off project; build this into your service model and charge a premium for it, but spread it out, and clients will give zero pushback.
[00:39:56] Tom: We probably didn't talk enough, and we've got other episodes that talked about this, but the forecast; so this plan is done and then the ongoing pieces are really important part to say, ‘Okay, now you've got a forecast that you're taking and having it evolve throughout the year.
[00:40:07] The Modern CPA Success Show, episode eight, has ‘Forecasting, How to do it Right.’ And in episode 48 is ‘How to Forecast using Graiff,’ which is a tool that we use for doing forecasting. So if people wanna learn more about forecasting and kind of processes, that's one of the ways they can do it.
[00:40:24] Adam: Man, you're full of good resources today.
[00:40:26] Tom: Yeah, I did a little bit of research. Well thanks, Adam.