Targets—Do we need to set targets?

With the annual budget cycle comes the process of setting targets. These are set for each area whether it is revenues or costs and then trickled down to cost-center owners or functional owners. During the goal setting process, there is constant back and forth between the  bottom-up process and top-down expectations. Even though companies have backed away from top-down goal setting, every company gives guidance and has a strategic outlook for the growth of the organization. On the other hand, the  bottom-up process helps us understand the needs of the functional managers who recognize  the needs at the lower levels of the organization.

But the give-and-take process between the  bottom-up and top-down processes often leaves a feeling of dissatisfaction for all parties. The managers who worked to develop a  bottom-up approach sometimes believe that their inputs were not taken into consideration and a number was just passed along. On the other hand, top management spends a lot of time managing the politics between different groups and divisions and come to think that strategic needs are not taken into consideration by the functional managers.

Target setting that has become part of the annual budget cycle is an important exercise for any company. As stated in a Small Business Chronicle article,[1] “Successful companies set goals. Without them, they have no defined purpose and nothing to strive for; consequently, they stagnate and struggle for meaningful accomplishments.” For the goal setting to be a meaningful exercise, all parties should understand “why” certain decisions were made and the process should be transparent.

The bottom-up process is a very meaningful exercise to appreciate the perspective on the shop floor. Transparency should be built at each step during a  bottom-up process to understand assumptions and the what-if scenarios. The senior managers need to know the impacts and risks of various scenarios without cushioning the numbers. On the other hand, top management needs to provide some high-level guidance on the overall market expectations and guidance to help the teams below understand how decisions will be made during the budget process.

Financial Planning and Analytics (FP&A) teams own the annual budget and strategic planning process for companies. Building transparency of assumptions from the bottom-up and guidance from the top-down helps to streamline the process and reduce friction. The reconciliation and decision-making meetings should be done in a more working-session manner with the ability to do what-if scenarios. This would allow stakeholders to understand the impacts of their decisions, reduce the effects of politics and lead to more data-based decision making. Collaborative technologies, cloud-based computing, and technologies mining big data can help streamline the target-setting process and FP&A has a big part to play in making this process more digital, collaborative and analytical.

---

[1] https://smallbusiness.chron.com/importance-setting-goals-business-834.html