FP&A Best Practice Principle 10: Establish short and longer term targets for business drivers
4 July 2018
This is the 10th of a 12-part blog series appropriately called "The 12 Principles of Best Practice FP&A". These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle 10: The best performing companies not only identify driver measures, they also establish long term and shorter targets for them
Instead of loosely configuring all the many aspects of FP&A, the best performing organizations tightly integrate them. That overall theme is also evident in the way KPIs are leveraged.
The importance of setting targets for business drivers
As discussed in the previous blog post, the best run organizations do a better job of identifying and measuring what drives success in their business. Further, they put those strategic business drivers to work by establishing both long term as well as shorter term targets for those drivers. They have a vision of where they want to be on those measures in the long term, but also “make it real” by establishing short term targets. More specifically, they establish long-term goals for KPIs and then shorter-term (usually annual) targets for those measures. In doing so, they develop a line-of-sight between where they are now and where they want to be.
Take for example a high tech company that identified Innovation as a driver of success. They decided to measure that as “The percent of sales coming from products introduced in the past 2 years.” They’re at 20% now and want to raise that to 40% over the next five years. With some efforts they already have in place, they believe they should be at 25% next year.
From a technology perspective, predictive analytics could help establish a baseline for those targets, economic drivers or other types of business drivers, which can then be adjusted for existing and new initiatives that will favorably impact those targets. While stretch targets should be sought, a baseline delivered through predictive analytics will help quantify how much “stretch” is really in the targets.
Of course setting near term and longer term goals is important, developing plans to actually achieve those targets is what separates the best performing organizations, and is the subject of our next post.
- FP&A Best Practice Principle #1: Translate Strategy into Actionable Plans
- FP&A Best Practice Principle #2: Identify and Gain Budget Approval for Required Resources
- FP&A Best Practice Principle #3: Connect Operations and the Financials
- FP&A Best Practice Principle #4: Analyze The Variance And Get The Story Behind The Numbers
- FP&A Best Practice Principle #5: Take Action when you fall behind on your Financial or Operational Goals
- FP&A Best Practice Principle #6: Cascade Financial and Operational Goals down to more Specific Targets
- FP&A Best Practice Principle #7: Hold people accountable to reach better financial results and link them to financial incentives
- FP&A Best Practice Principle #8: Link Financial Incentives to Operational Goals
- FP&A Best Practice Principle #9: Identify what drives success in your business and develop measures for those drivers
- FP&A Best Practice Principle #11: Develop initiatives and projects to achieve business targets
- FP&A Best Practice Principle #12: Monitor business results and tie them to incentives