5 best practices for annual budget planning

Budget planning season is crucial for setting the following year’s strategic direction, the team’s top priorities, and where your team needs to invest in order to achieve business objectives.

We’re firmly into the annual budget planning season. A time where probably zero engineering leaders get excited to populate spreadsheets for the finance team. But there’s more to this exercise than meets the eye.

Budget planning is a strange project that balances mundane activities like inputting line items into spreadsheets with high-level discussions about priorities, roadmap, strategic objectives, and the vision for next year. At least, that’s what it should be when done most optimally. 

If you’re not having those high-level discussions while budget planning then you’re likely to miss the opportunity to properly invest in resources for the year ahead. Yes, plans change, but aligning on the organization’s big picture before making resourcing decisions prevents unnecessary pivots mid-year that slow down projects and impede productivity.

The annual budgeting process

Annual budget planning is at its most simple when teams effectively collaborate across departments to arrive at a plan that aligns research and development (R&D) resources to the most impactful initiatives. This year brings an additional need for collaboration. The economic outlook is uncertain, and many companies are being advised to plan conservatively. At the same time, executive leadership teams are excited to experiment with Generative AI and are looking to R&D leadership for a long-term AI strategy.

This year will require bringing data to the table to back up your assertions regarding where you should invest resources, along with collaboration between product, engineering, design, and finance. Difficult trade-off decisions need to be made, and you need to be advocating for the resources that you’ll need to accomplish the big-picture goals.

We interviewed various engineering leaders across industries to better understand the best practices when it comes to effective budget planning and arrived at the following list. 

1. Present the plan as one united front

Product and engineering usually collaborate during the planning process to ensure they are on the same page, but that doesn’t mean they always present their plan as one unit. Product and engineering leaders need to consider presenting their annual plans together, as a united front. Non-technical leaders, such as your CFO or CEO, will see a united plan as a strong alignment between the two teams, perhaps giving them extra confidence to move forward with your headcount requests.

2. Be ready with a “backlog” of resource requirements

Always have a plan for what your teams would work on if given additional resources. This is especially important in smaller companies that frequently receive periodic investment funding, but it’s helpful even if you don’t expect this to occur. This might be less likely in this current environment, but when that changes, you’ll be better equipped to shift your team to accommodate the company’s needs. Preparing this view into what you’d work on given extra resources also partially demonstrates the difficult trade-off decisions you had to make during the planning process.

3. Show your work: present multiple plan options and your recommended approach

When making the case for additional headcount, your CFO or CEO may need to better understand the trade-offs that you’re suggesting and how your choices further the business objectives. These conversations become more difficult as companies mature, especially when the headcount is for work related to customer support, infrastructure, system maintenance, etc. Have a coordinated plan with your head of product for bringing in more technically-leaning roles and how they can enable desired business outcomes.

4. Keep collaboration and tooling simple

The tools you use for collaboration between product and engineering matter less than the quality, content, and frequency of your communication. While there are generic planning software tools that can be customized to fit your planning process, there is a significant amount of time that goes into managing them. Every planning process and company structure is different, even if there are common methodologies such as zero-sum budgeting that are followed by many companies. Ultimately, if you think you don’t have the right tools to coordinate effective annual planning, it’s more likely that you have a communication and collaboration problem.  

Simple planning boards, spreadsheets, and basic systems/software for stack ranking priorities and evaluating headcount needs can used across companies both large and small. While they lack in “feature robustness,” and could require additional steps to output what your finance team needs, they easily allow for collaboration and active participation during trade-off discussions. During collaboration, simplicity and accessibility should be the highest priorities in order to ensure all team members are focused on what matters: collaboration and healthy conflict.

5. Bring data to the table

There is plenty of engineering data at your disposal that is invaluable to the planning process. 

While it will happen from time to time during your leadership career, you want to avoid making additional headcount requests due to inaccurate work estimations – a phenomenon that takes place when there’s no baseline for where your teams are spending their time currently. 

Here, a metric like Allocation may be able to help inform your work estimates. Using engineering management platforms (EMPs) can also help seamlessly automate the process of pulling this metric amongst other insights by processing signals from the tools your software teams are already using.

Bonus 2024 best practice: Build your AI strategy

2023 was the year of Generative AI (GenAI). The world has become fascinated with the possibilities associated with GenAI as interfaces such as ChatGPT, Dall-E, and others trickled into the mainstream. 

It’s only a matter of time before your board of directors or your CEO will inevitably ask for an AI strategy. Can it be incorporated into the product roadmap? What experiments are we running? When can we expect to see efficiency gains from AI?

Start forming your AI strategy now and bake it into your headcount and budget planning. It’s better to guess what your AI resource requirements are now before you catch yourself in the middle of next year needing to make adjustments.  

The R&D Budget Planning in the Year of Generative AI was written to discuss how organizations approach budget planning, weighing the pros and cons of each approach, and ultimately helping you maximize the total value you get from the budget planning process. For more information about engineering budget planning, download the full guide.

Final thoughts 

Operating constraints are really powerful, and in this current economic climate, your team might be operating with many. They force hard choices. They make us improve the degree of rigor that we’re bringing into our decision-making. In more constrained environments, you need to bring more data to your decisions. Many teams can expect to go through a scenario-based approach to budget planning where they model out different situations so that as the climate changes, they’re prepared for those changes with different assumptions baked in.

We challenge all to lean into the data-driven decision-making that this type of planning will require, bringing better data insights to the table. Data-driven decision-making shouldn’t be limited to times of efficiency, and our teams will only be better for it when the tides turn and we head back to an era of growth.