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Long game

"Forget your title. You're the company's resource allocator. That's it."

I'd just landed my first BU CFO role, and this was Sam’s (Group CFO) idea of a welcome speech.

I thought he was oversimplifying. Still, I nodded along.

Sam wasn't finished yet…

"The long-range plan (LRP) isn't some pointless spreadsheet exercise. It's where you make the most important decisions. Where you ask the questions nobody wants to answer. Do the LRP right, and everything after that is just glorified execution."

As time went on, and the more I considered Sam's words, the more they resonated. The LRP wasn't just another deliverable. It was my one shot per year to reset the boundaries of the business.

After that conversation, I became ruthless about forcing tough decisions into the LRP.

Long Range Plans: Where Dreams Go to Die

Welcome to part 2 of this 9-part series diving into FP&A.

Last week, we summarized the overall FP&A cycle. This week, we will break down the first part of that cycle: the Long Range Plan, or LRP for short.

Depending on your company and the current CFO, you might hear it referred to as Strategic Plan, 3/5 Year Plan, Economic Plan, Long Term Plan, Strat Plan, etc.

But forget what you call it. It’s what it does that matters.

Let’s define the LRP.

What is a LRP?

The LRP is the process for setting a high-level multi-year financial plan for the business.

Think of it like a strategy, but written in numbers rather than words.

What is an LRP for?

It is not the purpose of the LRP to be an accurate forecast. That’d make life boring, anyway.

The purpose is to provide a framework to make choices about company resources. Yes, capital. But also human resources, technology resources, and anything else you have that is valuable and scarce.

That is the primary purpose. There are also a bunch of secondary purposes:

• Direction for the top-down budget (more on that next week)

• The output (multi-year forecast) can be used to communicate with investors, i.e., long-term guidance for capital market investors

• Testing covenants and potential long-range financing issues

• Prove going concern to boards and auditors

• Set long-term incentive targets for execs

Embracing key trade-offs early

When I reflect on the 20+ annual financial cycles I’ve been through, some have gone well while some have been a train wreck.

The bad ones were bad because we didn’t face the tough choices soon enough.

Great businesses embrace trade-off decisions head-on.

Some examples:

• We can buy Business A, but it means delaying the execution of improvements in our core business

• We can invest behind the capex plans of Business B or C, but not both

• We can grow sales by 10%+ but only if we sacrifice 50bps of margin per year

• We can commit to reducing Scope 1 & 2 carbon emissions, but it will cost $$$

If you fail to clarify these trade-offs in the LRP, that ambiguity will infect the annual operating plan in the budget. The second and third level consequences will spread like a disease in the org.

And how do department leaders deal with the sickness? They build in redundancy and resources to counteract the uncertainty. That fogginess multiplies like bacteria. And it only gets worse as it cascades through the levels of the business.

As you might have guessed, the best way to avoid your business becoming a cesspool of ambiguity and wasted resources is to get it right in the LRP process.

The 4-Stage LRP Model

Introducing the 4-stage long-range plan process:

Each stage has many steps to it, designed to break this complex, multi-headed snake into manageable chunks.

The stages also line up with the right intervals to check in with your stakeholders. Let’s tackle this point by point.

Phase 1: Set the Foundation

I’ve seen many LRP processes go wrong due to a lack of up-front alignment between the Board, CEO, CFO, and other Execs. So the purpose of step 1 is to make sure that doesn’t happen.

At this stage, a very small number of people should be involved. The exec, the board & max 2-3 people from the corporate side who are coordinating the process (likely from FP&A or strategy).

From now on, I’m not going to talk much about how you work with the CEO. The reality is you need to be joined at the hip throughout the LRP process.

Start with strategy

Defining the strategy itself is out of scope for this series, but know this: a good LRP process is downstream from a good strategy.

The less alignment there is on the strategy, the longer (and harder) the LRP process. If you don’t have the luxury of a clear, well-documented strategy, you can (as CFO) use the LRP process to force that clarity. But that requires skillful politics.

I can think of many examples where I felt a strategy wasn’t clear enough on key assumptions:

• Is it more important to grow or expand margin?

• Will we be doing any M&A? Where? How big?

• Where are we reducing costs vs. making investments?

If you can’t answer these questions before the LRP process starts, you must be able to by the end.

As CFO, you own the modeling and the scenarios. This is a power that is useful in forcing strategic clarity.

Define constraints (financing, risk appetite, downside limits)

This is where you identify any major constraints on planning, specifically those set by capital structure, board/owner risk appetite, or known downside limits.

In practice, LRP decisions often pivot because of debt capacity, covenants, equity raises, or even currency exposure. Identify the most significant constraints now.

Some hard limits must be captured, e.g.:

• A dividend commitment for the next 18 months

• A no-M&A mandate from the board

• A VC growth expectation of 2x revenue per year

But be careful. The purpose of the LRP is to let the business bring its best ideas forward, unconstrained by today’s operational limits. Over a 3–5 year horizon, most constraints are negotiable. Defining constraints in the LRP means doing so carefully, precisely, and time-bound. That ensures you capture what truly limits the business, without killing stretch thinking.

Set modeling parameters

Before you race off and build a model, you need to put thought into the dimensions you are modeling. The objective with an LRP is to model on the simplest set of dimensions possible. I like to think of this across 4 dimensions:

1. Time Series: Typically 3-5 years, at an annual or quarterly interval. Also, define the base period or ‘Year 0’. Clarity on the base is crucial for what comes next.

2. Vertical Detail (Chart of Accounts/KPIs): Use a summary P&L, Balance Sheet & Cashflow + 5-10 high-level P&L driving KPIs. Remember, this isn’t a budget, so high-level is fine.

3. Organizational (Operating Units): Broken down by regions, countries, business units, products, departments, etc. This should be determined by organizational design. Ask who you want involved and at what level.

4. Building Blocks: At what level do you want to break down the movements from the base period through the years of the LRP? (e.g. Price/Volume/Mix, Risks, Initiatives, etc.) There is a lot more to say on defining and calculating those building block. So much that we are going to dedicate week 7 of this series to the topic.

Identify external benchmarks

Figure out who or what you are comparing yourself to.

Compile competitor benchmarks and market insights. This is a great time to meet your favorite investment bankers covering your sector. No doubt they will have 30 pages sandwiched between two pieces of blue card ready for you, and it will be full of information you can use.

Map major risks

Risk mapping is a whole topic on its own. We covered it briefly here, and will cover it from a strategic context in the future.

Risk mapping has become more strategic and dynamic than ever. 12 months ago, how many US companies would have had tariffs in the top right corner of their risk map?

And how many now? The world is changing, and risks are shifting faster than I have ever seen.

So, risk should have a central seat in your LRP process.

Early board alignment

It’s no good giving your board a ‘ta-da’ moment at the end of the LRP process. You need to take them with you. This is a great time to check in with them to make sure they don’t disagree with you on what the risks are, or what constraints we should consider fixed vs. negotiable.

Phase 2: Base Modeling

So far, you have done a lot of talking and thinking, but not a lot of actual work. Now you build the model and begin engaging one layer below the executive team.

Build model

Typically, a simple model works for 99% of businesses. It should be the thinking that is intricate, not the math. And if your dimension count is too big to be managed in Excel (even if you are using specialist software), you probably got Phase 1 (define parameters) wrong.

Your job is to facilitate choices and decisions, not produce the most accurate model you can.

The key functionality you need is to run scenarios and add or kill various building blocks or organizational units (this will be important in the next phase).

Define input governance (who owns what)

Every input in the model should employ a double-team defense:

• Business lead (the functional or BU lead, ultimately responsible for delivering the assumption)

• A finance partner (responsible for helping the business make sure the assumption is sensible and fed properly into the model)

Who is responsible for what (every input and every output) should be documented clearly. Zero ambiguity.

Engage business & compile inputs

Write a simple process document outlining the above, and build it into a timeline sharing roles and responsibilities, decision rights, expected outputs, project management, and any top-down targets.

Once the framework is clear, let the teams work. Business leads and their finance partners should build sensible assumptions, quantify risks, evaluate investments, and generate new initiatives. Keep a close eye on progress.

Don’t let time slippage take hold. If teams hesitate to engage, one line usually works: “If you don’t help build the input, you’ll have to live with the output.”

Iterate assumptions

At the end of this phase, you’ll have a patchwork quilt of assumptions. A solid start. But inevitably it will be riddled with internal conflicts.:

• Sales plans may not align with operational capacity

• Cost bases may fail to reflect increased activity

• Environmental targets may lack the investment needed to deliver them

• Growth or cost tasks with no owners

This is where rapid feedback loops and focused iteration are critical. The finance team’s job is to surface and facilitate these trade-offs, not necessarily solve them. Ultimately, the toughest investment calls sit with the CEO (with your support) or the full executive team, if consensus is needed.

Board check-in

You may also consider a board check-in here, especially if the model builds in assumptions that the board might fundamentally oppose. But tread carefully. Some boards will jump to conclusions or start steering the process too early. Whether to engage at this stage depends entirely on your board’s discipline and working style.

Phase 3: Run Scenarios

In phase 2, you’ve opened the process up to more people in the business. To make sure you have a well-populated model and a well-engaged leadership team.

Now it’s time to close it down again and work just with a small group: CEO, CFO, Exec, & FP&A lead.

It’s time to test those investments and aspirations you gathered in phase 2.

Toggle investments

What investments should you make or not? Your model will have identified the universe of investment opportunities. It’s always more than you can afford. Your model should allow you to play with these, switch them on, and off. Compare their cashflow profiles. Which are most attractive? How do you prioritize the opportunities?

This is similar to the ‘envelope’ setting process described in the recent CapEx series.

Toggle M&A

At this stage, you should also overlay the impacts of any potential options you have that would alter the perimeter of your business:

• M&A

• Joint Ventures

• Divestitures

• Closures

Understand the impact and compare it to your organic investment opportunities. If it’s easier and cheaper to buy a competitor to double revenue than invest to do so organically, then now is the time to figure that out.

Identify Options on ‘Unfunded’ Basis

You now have enough to start landing on some ‘real options.’ So far, everything has felt like 4D chess. But normally by this stage it's possible to distill your options down to 2 to 4 ‘real options.’

While you may technically have many more possibilities than that, you will often find that each of those cluster around a few different sets of real options that dominate the others that are like it.

You are doing this on an ‘unfunded basis’, i.e., your plan may not be affordable with your current financing. But your starting assumption should be that is a CFO problem, not a business problem. If your plan is good enough, it is your job as CFO to get it funded.

Test financeability and capital markets fit

With your ‘unfunded options’ set, you should now determine whether they are financeable.

The sequencing here is critical to make sure you don’t unnecessarily limit options that are not fundable today, but could be in the future.

What would the optimal capital structure look like for those options? Model the cost of equity, debt, the mix, and any covenants.

If you have identified an option that is truly outside of funding range, now is the time to eliminate it or tweak it. This leaves you with your ‘funded scenarios.’

Pressure-test downside

Against each of your funded scenarios, you should also run downside sensitivities. I tend to run what I think of as a fifth percentile case, i.e., what would the set of assumptions look like that drives a 1 in 20 bad outcome? This is when you pressure test inflation, interest rates, funding availability and cost, tariffs, FX, tax assumptions, etc.

Pre-decision board alignment

You, along with your CEO, have probably started to form an idea of what your preferred scenario or ranking of the options is. So, at this point, you should check in with your board and ideally be anchoring them around your expected recommendation. It’s also a good way of making sure your board doesn’t hallucinate a new scenario in the next phase.

Phase 4: Decide & Commit

You’ve done the work, now it's time to make a decision on a scenario, lock in the LRP, and communicate it.

Finalize recommendation

You and the CEO together should now be in a position to land on a proposed LRP output.

This is when you’ll figure out which is most important:

• Equity value at the end of year 5?

• Cumulative cash generation across the plan period?

• Dividend maximization?

• Market share?

• Carbon reduction?

Any CEO or Board of Directors will tell you they want all those things.

But it's when faced with the informed choice that you’ll find out which of these is actually most important.

Check execution readiness

You need to make a final assessment about whether your selected plan is executable.

• Do you have the human, technological, and financial resources you need to execute? If not, what do you need to change?

• Is it realistic? Do you need to change the plan?

‘Wedding vows’ moment

And now that you have a direction, you need to ensure your execs are on board. This conversation should finish with a ‘wedding vows’ moment.

Where all people involved with the process agree that they are married to both the assumptions and the output of the plan, and are ready to consummate.

For maximum impact, do this with all key stakeholders in the room together. Think of it like a ‘speak now, or forever hold your peace’ moment.

This is a crucial tool for forging executive commitment to the plan and its assumptions. Whenever I have done this, I have ALWAYS found it useful as a tool for heading off slippage later: “Do you remember when we all agreed this was the plan? Why didn’t you raise this then?”

Present recommendation

It’s time to present your recommended path to your board to get it finalized. If you’ve taken them with you and walked through the process, there should be no surprises by this stage. Still, make sure you have a simple pack that tells the story. It’ll be useful when referring back in the future, and the detail is less fresh.

Lock LRP

Once you have a confirmed scenario, you need to lock this in. This is your LRP.

There might be circumstances in which you revisit it (like a rebasing closer to the year end), but unless something dramatic shifts, you should not be revisiting the principles that drive it.

Communicate internally and externally

With the decisions made, now you need to communicate the output of the process to the wider stakeholders: BU leadership teams, department VPs, etc.

You also need to think here about the interaction with your investor relations, and how you feed it into your Wall Street guidance model, or share it with your PE/VC paymasters.

This is also the time to lock in or revisit any exec incentive plans that need long-term targets, while the wedding vows are still fresh!

You should also identify any urgent actions that the LRP surfaced. This is a strategic exercise, so this shouldn’t be a long list. For example, if there is a specific funding issue identified, you might need to get on that right away.

Net-net

If you’ve done this right, your LRP should have brought clarity to the strategy and the priorities. While eliminating a bunch of noise. In doing so, the CFO owns the link between strategy, capital, and results.

The rest of this series will focus on how we operationalize the LRP, which starts with the budget process. More on that next week!

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