Your Guide to Crafting an Effective Annual Operating Plan

Your Guide to Crafting an Effective Annual Operating Plan

An annual operating plan is the backbone of your brand’s financial success—it guides your operations, goal-setting, and financial decision-making. 

But, if you have yet to build your own annual operating plan, the process can seem intimidating. The six-step checklist below will help you build an operating plan that works for your business, accommodating your current financial status and facilitating future growth. 

With simple financial analysis, budgeting, planning, and auditing, your brand will be ready to conquer the next fiscal year.

What is an Annual Operating Plan?

An annual operating plan is a strategic planning document that shapes your business’ financial activities for the coming year. But, you may have heard it called another name, like:

  • An annual budget
  • A master budget
  • An operating budget
  • A customized, brand-specific name

An annual operating plan serves as an overview of your financial functions. Some of its primary purposes include:

  • Defining strategic, year-long goals
  • Establishing financial targets and budgets
  • Monitoring and dictating incentive-based pay structures
  • Identifying and maintaining your cash position
  • Outlining funding requirements

While your annual operating plan will likely be built primarily by your finance team, you will also need to seek input from other departments, including:

  • Sales
  • Advertising
  • Marketing
  • Production
  • Purchasing and Procurement
  • R&D
  • Customer service

If you operate a small business, you may oversee all of these departments yourself or carry out their duties—and you will need to draw on all of your professional expertise when building an effective annual operating plan. 

How to Build an Annual Operating Plan from Scratch

So, how do you build a robust, useful annual operating plan? These six steps will guide you through developing an airtight plan for your business’ short-term financial future. 

#1 Generate Key Financial Reports

The first step to building an annual operating plan is generating three key financial reports:

    • The income statement – A description of money made and spent
    • The balance sheet – A list of assets and liabilities—funds available and funds owed
    • The cash flow statement – A ledger of cash receipts and purchases over a specific period


Each of the reports above will help you determine how much money your business currently has, how much it needs to spend to continue operating, the amount owed to other businesses or individuals, and the ratio of revenue to expenses. This collectively comprises the critical data you need to start building your annual operating plan. 

#2 Establish a Sales Budget

With a clear picture of the money available to you and your recent financial history in hand, you can begin budgeting. 

There are two crucial arms of your business, and you will need to create spending, earning, and saving guidelines for each one:

  1. Sales functions
  2. Production functions

To develop your sales budget, you will need to determine:

  • How much your sales department can actually sell during the coming year
  • The funds needed to reach their sales benchmarks, supporting functions like:
    • Overhead, including:
      • Payroll
      • Employee training
      • Software and hardware
      • Marketing and advertising
      • Customer relationship management (CRM)
      • Networking

You can use past spending data to estimate the resources needed for your sales team to reach its goals. 

#3 Create a Production Budget

Equally crucial to the sales department that directly generates revenue through clients purchasing your products or services—you need to fund the various production teams that develop, build, transport, and troubleshoot them. 

Building a production budget is similar to determining a sales budget. Ask yourself two crucial questions to determine how much money you will need to reach your production goals:

  • How much can the production department create with its current resources?
    • Resources include:
      • Trained staff
      • Materials
      • Programs or digital tools
      • Available workspace
      • Time
  • How much money will it take to achieve production benchmarks?
    • Like the sales team, be sure to account for costs associated with:
      • Overhead
      • Materials acquisition and storage
      • Standard operating procedures (SOPs)
      • R&D

When setting goals for your production team, use operational data from the previous year as a guidepost, making changes to account for shifts in the market and overall capacity. 

#4 Outline Fixed Expenses, Non-Cash Expenses, and Non-Operating Expenses

Once you establish the estimated costs for your sales and production arms, you need to outline other financial elements that will impact your cash flow, operations, and fiscal reporting at year-end. These elements fall into one of three categories, and include:

  • Fixed expenses, or financial obligations that are unlikely to change, such as:
      1. Rent or real estate costs
      2. Internet and other communication utilities
      3. Management staff salaries
      4. Costs to administer the employee benefits program
  • Non-cash expenses, or exchanges that do not directly impact your cash flow, like:
      1. Depreciation
      2. Amortization
      3. Depletion
      4. Deferred costs
  • Non-operating expenses, or money spent outside of sales and production, including:
    1. Tax payments
    2. Gains and losses
    3. Interest paid to loans

#5 Set Goals and Determine Needs

Your sales budget, production budget, and miscellaneous expenses will form the bulk of your annual operating plan. But, after you lay out the numbers, you can determine what to do with them by setting goals and determining what you will need to reach them. 

To ensure realistic goal-setting, set two types of benchmarks:

  • Conservative goals that you can accomplish with relative ease

If you want to bring on more staff to increase productivity and profits, for example, you could lay out your goals as follows:

  • Conservative goal: Hiring five new employees
  • Stretch goal: Hiring ten new employees
  • Needs: Funds to pay and train new staff and money to expand your workspace

#6 Plan Implementation and Auditing

Your annual operating plan should also outline implementation procedures and internal auditing practices—essentially, an standard operating plan (SOP) for putting your plan into practice. 

Create protocols for:

  • Issuing budgets to individual team members or departments
  • Reviewing budget comments and requested changes
  • Processing and approving requests for additional funds
  • Regularly reviewing the budget throughout the fiscal year
  • Implementing changes to protocols, goals, and needs

It will be much easier to administer, maintain, and review your plan once you create a stepwise implementation protocol.

Build an Annual Operating Plan with CFO Hub

Building an annual operating plan will help you determine how much money you have to work with during the next fiscal year, how to divide your available funds, and what to do to secure future profits and additional growth. 

Even seasoned business owners can encounter difficulties with financial planning—when you need expert advice, CFO Hub can help. 

Our experienced team of full-time, part-time, and fractional finance professionals can fill any niche on your accounting team—whether you need help preparing for an audit, general bookkeeping support, or large-scale CFO services, CFO Hub can help you navigate your financial operations with ease.

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