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Are your financial targets "on purpose"?

 

Some things never change.

 

The end of the financial year continues to create a rush of activity for many businesses. 

 

Usually it’s all about trying to make last minute improvements to the bottom line to ensure profit targets are met. And when the dust settles, everyone breathes a sigh of relief before beginning the wind up to next June 30.

 

You can change the dates if your reporting year is different, but you get the drift.

 

Groundhog Day anyone?

 

Over the entire length of my corporate life I struggle to recall one single new financial year when my team’s financial targets were not:

 

  1. “cascaded” (sounds like such a pleasant experience…) from above: and,

  2. met with a short sharp intake of breath which I could only take as signifying horror.

 

And therein, folks, lies the issue.

 

Here’s how it works in businesses large, small and in-between. You can skip this part if you already know how it ends….

 

Step 1: At some point every year the planning cycle starts, generally with a look at how the current year’s tracking and how prior years have gone. Then, “first pass” budgets will be prepared across the business, submitted and “rolled up” into a consolidated picture. 

 

Step 2: Some time passes which, given the tight deadline for submitting budgets, seems unnecessarily lengthy. Just when you’ve almost forgotten you prepared a budget at all, you get the email - the one that says budgeted expenses are too high, and revenues are too low.

 

Step 3: You’ll go backwards and forwards with revisions until eventually you’ll get to the number the finance folks wanted in the first place. A number that’s usually a double digit percentage increase on last year.

 

Sometimes I've tried to short circuit the process by asking the finance guys what number they’d already written into the plan for the year.

 

Here’s how that conversation usually went….

 

Me: “So how about we make it easy on all of us this year, and you tell me what percentage growth you’re looking for?”

 

Them: “Now now, Doug. That’s not how we do it. We value your input and can’t really finalise next year’s plan without it.”

 

Me: “Ten percent increase in revenue then, is it? Same as last year. With expenses held steady. Also same as last year.”

 

Them: “You seem a bit hostile, Doug. Nobody else has been obstructive during this process.”

 

Me: “On the contrary…I’m being neither hostile nor obstructive. I’m hoping to save everyone a lot of time, effort and anxiety by delivering to expectations. If I can do that with my first effort, imagine how great that would be.”

 

Them: “Now now, Doug. That’s not how we do it.”

 

At which point, I’d see the conversation going around in circles and give in. 

 

Sadly, I’ve not made that up….

 

That's not very "on purpose"...

 

Alert readers will notice there’s no mention of a reference to business purpose, vision or strategy in the process outlined. That’s because they're rarely actively considered in the process. 

 

What are the key dangers in preparing annual plans in isolation of purpose, vision and strategy?

 

1. Short-termism 

 

The focus becomes almost totally on what the business must achieve, financially, in the year ahead. Little or no regard is given to what must be achieved if the business is to be true to purpose.

 

Where any attention is paid to the longer term, achievement of agreed strategic milestones remains secondary to achievement of this year’s (or even this month’s) financial targets. 

 

2. Co-operation and collaboration go out the window

 

In the context of achieving anything other than short term targets, people will be disinclined to actively seek each other out to work together. 

 

3. Innovation and imagination become stifled 

 

People in the business are more likely to focus on what must be done to achieve the targets rather than what could be done in the context of purpose, vision and strategy.

 

4. The business becomes more inward-looking

 

This is particularly true when financial results lag targets. The tendency is to remediate by cutting costs which rarely has a positive impact from a purpose perspective.

 

5. Team engagement suffers

 

There’s just so much evidence to show that team engagement is higher in businesses that are truly purpose-driven. It’s also a fact that engaged teams directly impact customer satisfaction and propensity of customers to remain customers, to become repeat purchasers and to be advocates for the business.

 

So targets are bad then?

 

Not at all.

 

None of this is meant to even remotely suggest that financial targets are a bad thing. It’s simply that too often, they’re formulated with little or no thought to the longer term, purpose-driven aspirations of the business. 

 

How could you better deal with the planning process and formulation of targets? Maybe try starting with this question:

 

“In the context of our business purpose, our vision and strategic plans, what key initiatives are underway that will continue into next year? What new initiatives have we agreed for the year ahead (and beyond). What will be our investment in those initiatives and how will they impact revenues in the short and longer term?”

 

Let's be honest with ourselves...

 

Starting with a preferred financial outcome and working backwards might be something you’ll get away with for a while. But it’s not the path to a healthy, functional and sustainable business that will attract and retain customers nor engage team members. 

 

It’s that simple. 

 

My BusinessBlades colleagues and I have always maintained that how a business fares financially is an output of everything else that happens within it. 

 

Peter Drucker says it better:

 

“Profit is not the purpose of a business, but rather the test of its validity.” 

 

How true…

 

Do you suspect setting targets in your business could be more on-purpose? 

 

We'd be happy to help, of course. Whether your planning process could use some minor tweaking or a major revamp, we have the tools to make it happen for you. 

 

In fact, we can't think of a good reason not to give us a call or drop us a line to start a conversation. 

 

At the very least, why not check out some of our previous posts? We're sure you'll find some gems!

 

Join the conversation!

 

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