The strategic foundation: top-down planning

In top-down financial planning, Executive Leadership leverages external inputs such as Total Addressable Market (TAM) analysis, competitive dynamics, and technological developments to establish a strategic vision for the organization, paired with north star objectives for the company to achieve. An example of a north star objective would be “achieve $10M ARR over the next three years.” 

North star objectives are important for financial planning because they:

• Act as the ultimate measure of success for the business
• Create alignment between teams and initiatives
• Simplify complex business dynamics into a handful of key metrics

Once north star objectives have been set, each department is assigned supporting goals aligned to the north star objectives. Marketing, for example, may be tasked with a Net New Pipeline goal that supports the organization’s north star revenue target, while Customer Success is assigned an expansion revenue goal to support the same target. Finally, Executive Leadership partners with Finance to allocate budget and headcount to each department. Allocation decisions are typically based on strategic importance and operational requirements. It’s also common for organizations to conduct quarterly budget reviews and performance-based reallocations throughout the year to keep departmental budgets up-to-date.  Top-down financial planning offers several benefits: 

1. Strategic direction: Top-down financial planning aligns the entire company to the leadership team’s strategic goals, which helps teams stay focused on high-priority deliverables. 
2. Efficiency: Top-down financial planning is often a faster decision-making process than bottom-up planning, as it is driven by Leadership and requires input from less stakeholders.
3. Cross-functional coordination: Top-down financial planning makes it easier for organizations to focus on the big picture and encourages alignment across different departments.

The same characteristics that make top-down planning effective–its forward-looking, visionary focus–can, however, lead to frustration for functional teams. By failing to account for internal analysis, top-down planning can result in unrealistic goals that are out-of-touch with organizational realities. This is where bottom-up planning comes in. 

Ground-level reality: bottom-up planning

Bottom-up planning uses a variety of internal data points, such as customer feedback, usage data, marketing engagement, and sales pipeline, to make financial projections. This analysis is driven at the team-level, and then is aggregated to a unified strategy that includes growth goals, product strategy, and departmental costs. 

Finance and Executive Leadership will typically review this strategy and make decisions on organizational goals, as well as resource allocation across departments based on those goals. 

Bottom-up financial planning has multiple benefits:

1. Ensures realistic goals: Bottom-up planning allows frontline teams, who have detailed knowledge of day-to-day operations and practical insights, to drive the goal-setting process, often leading to more achievable targets.
2. Team buy-in: Bottom-up planning provides employees with a greater sense of ownership and accountability, increasing motivation and strengthening alignment. 
3. Innovation from diverse perspectives: Bottom-up planning encourages fresh ideas from across all levels of the organization and promotes a problem-solving culture.  

Bottom-up planning provides the operational accuracy that top-down planning often lacks, aligning goals to historical performance and organizational capacity. Its grassroots methodology can, however, fail to define a unified strategic vision for the company. In this day and age, SaaS teams must utilize a combination of top-down vision and bottom-up analysis to navigate complex market dynamics. 

Integration: bridging top-down and bottom-up

As is the case with most things in SaaS, the reality is that financial projections rarely follow a simple framework. Modern SaaS teams are blending top-down and bottom-up analysis to develop the most comprehensive financial plans they can.

Top-down financial planning is great for establishing a strategic vision, anticipating market shifts in order to guide the company in the right direction. Bottom-up financial planning, on the other hand, makes predictions based on a more practical view of the organization, accounting for factors such as sales pipeline, customer engagement, and team capacity. Marrying top-down and bottom-up planning therefore requires a balance between vision and practicality, ambition and feasibility. 

It’s helpful to start by using top-down methodology to establish a unified strategic direction. Next, functional teams can use bottom-up analysis to validate the feasibility of that direction and refine any assumptions. Stakeholders in the planning process can then work to bridge the gap between top-down vision and bottom-up analysis through iterative reviews, stress testing assumptions and planning different scenarios to prepare for variability. The final plan should balance strategic ambition with operational reality. Furthermore, all goals and targets should have evidence-based plans to support them. 

Here are five tips for bridging the gap between top-down and bottom-up financial planning:

1. Establish 3-5 high-level strategic goals first, each with defined success metrics, and rank them in importance. 
2. Identify non-negotiables to protect critical investments.
3. Quantify trade-offs in order to make better decisions, conduct ROI analysis, and balance short-term and long-term impact.
4. Communicate transparently and foster collaboration throughout the strategic financial planning process.
5. Say no when necessary, especially to low-impact projects, and avoid spreading resources too thin. 

Anrok CEO Michelle Valentine notes, “as you work through this reconciliation, keep a keen eye on the realism of your revenue goals. It's easy to get caught up in optimism, especially when you're innovating in exciting areas like AI. But grounding your projections in market realities will serve you better in the long run.”

Key financial considerations when bridging top-down and bottom-up

Let’s dive deeper into how you can use top-down and bottom-up approaches to accomplish the core components of strategic financial planning. 

Revenue modeling and growth projections

Revenue modeling is the crux of strategic financial planning for growth-stage SaaS companies, as it sets the ARR targets upon which all resourcing and investment decisions are based.

Top-down revenue modeling begins with TAM analysis, establishing target market share and working backwards to define revenue goals and resourcing requirements. Bottom-up revenue modeling sets ARR targets based on analysis of current pipeline and market engagement, using historical conversion rates to set feasible goals. When marrying the two approaches, organizations have the chance to compare the opportunity in the market with their capacity as an organization and define the best objective for the company.

Cost structure analysis and optimization

Cost structure analysis is important as it leverages efficiency metrics, such as Customer Acquisition Cost (CAC), to measure operating efficiency across the organization. As more SaaS businesses are abandoning the ‘grow at all costs’ posture and prioritizing financial stability, cost structure analysis is becoming an increasingly important part of financial planning. 

Top-down cost structure analysis sets efficiency metric targets based on industry benchmarks and peer comparisons, and then assigns goals throughout the organization. Bottom-up analysis looks at current resource requirements and historical cost drivers (CAC, infrastructure costs, etc.) to set target efficiency gains. By combining both top-down and bottom-up cost structure analysis, SaaS businesses can ensure they’re performing comparably with their industry while also setting realistic improvement targets for functional teams. 

Cash flow planning

Closely related to cost structure analysis is cash flow planning, which uses efficiency metrics and income predictions to forecast the amount of capital available over a given period of time. 

Top-down cost structure analysis, often led by the board and senior leadership, sets target metrics, such as free cash flow, based on funding needs or investor expectations. Leaders then use those predictions to assign budgets across the organization. In bottom-up cash flow planning, functional leaders examine existing payment cycles and expenses to develop cash flow predictions. Blending top-down and bottom-up approaches to cash flow planning is important as it enables teams to consider both external cash flow factors (funding environment, market activity) and internal cash management. 

Resource allocation

Once revenue and cost goals have been set, organizations can decide how to distribute resources across the company. Resource allocation is a critical step in strategic financial planning as it optimizes the balance of the organization for achieving the established north star objectives. 

Top-down allocation methods follow industry benchmarks for resource distribution while accounting for the organization’s strategic priorities. Bottom-up resource allocation, on the other hand, analyzes team-level requirements and distributes resources based on operational needs and opportunities for growth. Combining top-down and bottom-up approaches allows organizations to support the biggest opportunities across the company without losing sight of industry best practices. 

Risk assessment

Risk assessment is often one of the final steps of strategic financial planning, and certainly one of the most important. 

Top-down risk assessment analyses external market factors, such as financial, strategic, and technological risks, to assess potential threats to the established business objectives. Bottom-up risk assessment examines risks within the organization, such as churn risk, tech debt, and employee retention, evaluating their potential for impacting goals. Leveraging both top-down and bottom-up risk assessment enables teams to run a more thorough risk assessment process, ultimately resulting in a more comprehensive financial plan. 

Implementing your strategic financial plan

Once you’ve leveraged a combination of top-down and bottom-up planning to create your strategic financial plan, it’s time to implement your plan across the organization. Implementation can make or break your planning process–launching your plan effectively is the best way to set the organization up for successfully achieving your north star objectives. 

Before introducing your strategic financial plan to the organization, ensure you’ve defined measurable KPIs for each strategic priority and designated accountable owners for each key metric. For example, the Marketing department may be tasked with generating $10M in sales pipeline by end of Q1, with the Head of Marketing specified as the owner of the goal. Teams should be empowered to make decisions within their scope, as this increases buy-in and promotes a problem-solving culture. 

Once the financial plan is communicated to the organization, it’s important to establish a regular review cadence. It’s also beneficial to create automated reporting that tracks progress dynamically, if not already available. 

No matter how robust your forecasting, business outcomes don’t always go to plan—particularly in the ever-changing world of SaaS. In such cases, it’s tempting to adjust financial plans in an attempt to course correct. To avoid reactionary decision making, establish clear thresholds for plan revisions during your financial planning process, and create contingency plans based on different scenarios. 

Best practices for financial planning success

Strategic financial planning is a complex process that is often unique to every company. Here are three best practices for developing a financial plan that supports your organization’s needs. 

Leverage the best of top-down and bottom-up

Modern SaaS businesses are blending top-down and bottom-up methods to develop more comprehensive financial plans. By balancing strategic vision with operational reality, you can create a plan that navigates market complexities while supporting teams’ capacities. 

Build scenario models

Include best-case, base-case, and worst-case scenario models in your financial plan. These models should flex key variables such as revenue growth, churn, and expense increases to account for different outcomes. It’s additionally beneficial to incorporate 5-10% contingency buffers in your financial plan to budget for unexpected upside opportunities and downside risks. 

Stay agile and flexible

Don’t let your strategic financial plan prevent you from adjusting to new realities. Prioritize adaptability over rigid adherence to original forecasts. Empower teams to make quick decisions and allow for flexibility when it leads to the same outcome.

Whether you take a top-down or bottom-up approach, or a combination of both, strategic financial planning involves numerous stakeholders and many moving parts. A key component of successful financial planning is sound documentation. To help simplify your next financial planning process, we’ve created a flexible, easy-to-use financial planning template. You can download it for free here.