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2 minute read / Nov 26, 2012 /

A Startup’s Two Financial Plans - the Board Plan and the Stretch Plan

Last week I wrote about the importance of a financial plan for startups at every stage. It’s a challenge to balance the predictability the board requests and the ambition the company wants.

Often, as startups grow, they adopt two plans: a board plan and a company plan. By creating two plans and presenting each to the right audience, founders can communicate and motivate their teams effectively.

The board plan is the more conservative of the two. Typically, the founding/management team has a high degree of confidence in the board plan, something like 90% confidence. The board plan’s audience is the board. It’s often viewed as the commitment the management team makes to the board, so it can be used as a framework for evaluating the team’s performance at quarter or year end.

The company plan is the stretch plan, a 70% confidence plan. The company plan is often a roll up of the goals or OKRs (objective and key results) of each individual team. The company plan is the aggregation of the commitment teams within the company. It’s useful as a framework for evaluating employees.

In practice, having two plans instead of one or none at all may seem like an additional complication. But there is a tremendous benefit - these two plans set the right expectations for each audience and enable the company to build predictability into the business while still setting ambitious goals.

The alternative, having only one plan that contains the stretch goals for employees and is also presented to the board, is a recipe for stress. In one scenario, the company is consistently missing plan because the stretch goals are presented as high probability. In another, the company is “sandbagging” - aiming to achieve only very realistic goals and not reaching high enough.

Managing expectations only increases in importance as companies become larger. Some publicly traded companies, like Apple, have three plans: the “street” plan, the board plan and the company plan. The street plan has about 99% confidence because investors are the most sensitive to missed expectations.

Setting the right expectations for the right audience can be a powerful management tool for founders.

NB: thanks to Justin Yoshimura who wrote me an email inspiring this post

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Financial planning for startups