Setting business goals starts with assessing the current situation. Assess where the business is financially today, and what performance levels the various departments are currently at. In other words, look at some trends of where the company has been heading over the last 12 months, decade, and everything in between.
Then, some external analysis can be done, such as with benchmarking.
There are two types of benchmarking that can be applied, both internal and external benchmarking. Internally, for example, performance can be benchmarked across teams within a department. Or, in external benchmarking, performance can be benchmarked across companies within an industry. External benchmarking can even be done across companies of a similar size but different industries.
For internal benchmarking, teams can compare turn around time (time it takes between receipt of a purchase order to the product being shipped), quantities produced, customer complaints, or any other performance indicator. These types of internal comparisons help managers understand what is possible, how much room there is for improvement, what obstacles specific teams might be coming across, pinpoint underperforming individuals, and what realistic goals would look like.
For external benchmarking, the company can compare overall revenue and growth, profit margins, research and development as a percentage of sales and net income. Key Performance Indicators for external benchmarking might include Days Sales Outstanding, Asset Turnover, and Days Sales in Inventory. This information is generally available on company websites in the Investors section. Goals can then be set realistically to how the competitors in the same industry are doing.
Another external benchmarking for companies outside of the industry could be regarding revenue growth in various economies. Walmart can compare itself to Amazon and change its strategy accordingly, for example, either deciding to enhance the in-store experience in ways Amazon cannot at this time, or deciding to prepare to compete in the online shopping experience.
After all of the benchmarking and assessment of current situations has been done, some realistic goals can be inferred. A couple of the things that need to be taken into consideration for future goals are
The current economic market.
Limitations of the company's size and availability of resources
Time it takes to make improvements
Changes in consumer tastes
Previous level at which improvements can be made.
The first time business goals are made will likely be a benchmark in and of itself! You might over- or under- estimate the amount of improvement that can be made in a quarter or a year.
You also might over- or under- estimate the amount of support the employees will need to have to be able to meet their goals.
After the goals have been set, they need to be defined. The goals need to be specifically measurable. If management gives the directive to simply improve quality there would not be a specific measure to portray success or failure. However, if management instead specified "reduce customer complaints by 30%", then that would be measurable. So, in other words, goals have to be measurable to be able to analyze success.
The next key step is to involve the employees. For the employees to be able to make improvements, they need to be aware of the goals that have been set for them. Communicate with them the specific goals, and then meet periodically to gauge feedback and areas in which they can be supported to achieve those goals. Many employees are happy to give suggestions, such as parts of the product that are causing customer complaints and maybe finding new vendors or working with the current vendors to improve quality or change the product in some way.
Ok, so at this point, we have analyzed our current situation, benchmarked internally and externally, set realistic goals, and involved the employees in the process.
The next step is monitoring. How often the goal is monitored has to do with the sensitivity of activities to the results. Some goals should be monitored hourly, some daily, some weekly, some monthly, and others on a quarterly basis. And, the goals may change based on the results of monitoring. Perhaps it was over or under-estimated how much improvement could be made. It's a fine line to walk regarding motivating employees and exasperating them. If the goal is clearly not achievable, adjustments can be made. You might also find that the goal was set too low, that it was actually much easier to obtain the goal than was previously thought. This can be due to the flywheel effect. A flywheel is a mechanical device specifically designed to efficiently store rotational energy, causing the wheel to move faster and faster with less energy. The flywheel effect is the effect that one improvement creates this cumulative effect, and so goals can be adjusted upwards accordingly.
In summary, knowing how to set both challenging and realistic goals is key for employees and managers to be able to assess and increase their value to the company.
by Cynthia Bassett Hartwig, CPA