Premises, Not Numbers: What Makes an Annual Plan Reliable

It is late October and the planning round is underway. The deck runs to sixty pages, the figures are consistent, the planned result is above the current year. Two hours later the plan is approved – and nobody in the room could say what it rests on. The discussion was about numbers. A plan, however, is decided by its assumptions.

Two planning patterns distort the picture in opposite directions, and both are common enough to deserve a name. The bricklayer sees mainly risks in the planning process, plans cautiously and regularly comes in well above plan – and anyone who asks whether the full potential was used is treated as ungrateful. The daydreamer missed the plan again last year, for reasons nobody could possibly have foreseen, and is better prepared for the coming year than ever before. Both deliver a plan in the formal sense. Neither one holds.

First the forecast for the rest of the year, then the new year

Before the coming year is discussed, the forecast for the remaining months of the current year belongs on the table. The earlier the plan is approved, the more this matters: a weak eleventh or twelfth revenue month, perhaps combined with a generous “thirteenth cost month”, pushes the plan into the utopian because the actual base is below the assumed one. A very strong close to the year has the opposite effect – it quietly takes the challenge out of the plan.

Some companies deliberately move their planning meeting into the first month of the following year for exactly this reason. The base is then known and no longer a matter for discussion.

The seven premises every plan has to answer

The decisive step is the discussion of the assumptions the figures were built on. Seven premises together give a largely complete picture of how solid a plan is and how much ambition sits behind it.

1. Market development. How will the markets we serve develop – and which factors drive or slow that development?
2. Displacement. Growing faster than the market means displacing others. Which customers, which products, at which price-performance positioning, against which competitors? If the answer is “we are still analysing”, the plan is not ambitious, it is unsupported.
3. Innovation pipeline. Which launches open up new customers or new fields of business, and which replace another supplier at existing customers? Lasting improvements to existing products belong here too, provided the price-performance ratio holds.
4. Phase-outs and flops. Which products are at the end of their life cycle or have turned out to be flops and will be discontinued? This parameter has to be anchored in the plan – even if the revenue plan wobbles as a result.
5. Price development. What average price development underlies the plan? Does it fit the market and the revenue targets, and is the price positioning realistic?
6. Projects. Which innovation, process, IT and investment projects have to be tackled, prioritised by how far each could be deferred? And – usually forgotten – which projects have been completed and free up funds?
7. Productivity. What productivity gain is built into the personnel plan? The measure that has proven itself is the ratio of personnel costs to value added. The question behind it is simple: is value added growing faster than personnel costs?

The seventh premise is where ambition shows most clearly – and it is the one most often skipped. Headcounts and cost budgets are absolute figures; they say nothing about whether the organisation has become more productive. The ratio does, and it stays comparable across economic cycles. We therefore recommend agreeing target corridors for personnel costs relative to value added over three to five years, instead of negotiating a new budget every year.

The ruler test against boom extrapolation

A plan is rarely written in normal times. It is written either after good years, in which case the curve is extended, or after a downturn, in which case the estimate is cautious. One simple check helps against both: put a ruler along your own revenue curve for the years before the last peak and extend the trend. The boom years sit above that trend, the downturn year below it.

The consequence is uncomfortable. Capacity, structures and fixed costs set to the boom level are later dismantled at restructuring cost – across the full cycle a zero-sum game in volume terms, with the restructuring cost left as a pure loss. Before any large investment, two questions are therefore worth asking: how does it affect the result and the balance sheet if a downturn follows immediately after the investment? And how could the bottleneck be removed without investing at all?

Two mechanisms that make a plan hold

An approved plan is not yet a steering instrument. Two mechanisms have proven themselves in practice.

The first: do not release project and investment budgets in full at the start of the year, but in quarterly tranches – depending on how the first months actually run. This is not distrust, it is protection against one’s own confidence, and it keeps the result within its corridor even when the first quarter turns out differently than planned.

The second: move from the one-off annual plan to a rolling plan updated every quarter. Three drivers are enough to start with – expected cost development, order backlog, and expected revenue over the coming twelve months. The effort is real, the gain is larger: management engages with the result drivers continuously rather than once a year, deviations become visible earlier, and the budget process turns into a more detailed continuation of a plan that is under observation anyway.

Recommendation

Make the seven premises a fixed part of the planning document – not as an annex, but ahead of the figures. Settle the forecast for the rest of the year before the new year is discussed. Agree quarterly tranches for project and investment budgets. And start the rolling plan with three drivers instead of waiting for the perfect system. The cautious planner and the euphoric one are answered by the same thing: assumptions that are backed up.

None of this is a guarantee. “Planning replaces chance with error”, as the saying goes – but the error can be contained, and that is the point.

Would you like to know whether your planning and your steering fit together? The Quick Health Check takes five minutes to complete and shows which state your company is in and which fields of action offer the greatest leverage – as a five-page profile, reviewed by an experienced consultant and free of charge. Start the Quick Health Check.

This article is based on chapter 8 of “Erfolgreiche Arbeit in Aufsichtsgremien” by Dr. Christoph Weiss, Ratgeber professionelle Unternehmensführung IV, 10-P Consult 2025.

Further articles:

The Leadership Control Loop: From Goal to Execution (link)

Defining KPIs: How a Business Goal Becomes a KPI That Management Trusts (link)

What Your Contribution Margins of the Past Five Years Reveal (link)