The answer to this question depends upon two things:  the context of the question and the timeframe being discussed.  As a part of normal business processes – performance targets, budgets, sales forecasts, and so on – a specific target is set.  For example, achieve $250,000 in annual sales.  This is an annual objective that has interim measures – daily, weekly, monthly, or quarterly.  The annual measure is usually static; the interim measures are “flexible” – if a measure is achieved ahead of time, it might logically be increased to continue to challenge the organization.  If it is missed, the performance gap may be rolled into the next period –to be “made up”.

Moving targets are often a part of robust financial forecast and analysis process.  Setting annual budgets and performance targets is simply the beginning of the financial management process.  As starting points, budgets lay the groundwork for operational performance within the fiscal or calendar year.  It is based upon the business’ best estimates, information, and assumptions about what the organization can do, should do, and expects to do.

As the budget year gets underway, new information and actual results occur that can be incorporated.  Think of the process this way, toward the end of the current fiscal or calendar year (possibly earlier), the business begins taking a look at expectations and plans for the next budget year.  These operating plans and assumptions take into consideration what the business has accomplished in the current year, economic conditions, client base, “capacity,” and known and anticipated opportunities.  All of this information is quantified into a sales or revenue plan for the coming year.

Once the sales and revenue projections are completed, it is time to plan the costs of delivering products and services, for administration, and infrastructure investment required to support the planned sales/revenue.  All of this information comes together in pro forma financial statements that are the business’ “best estimate” of the coming year’s performance.  For some businesses, the process stops here.  The budget or plan is set and, at most, it may be used as a comparison for what actually happens.  Often it sits on someone’s desk or gets tucked away in a drawer or on a shelf.  It isn’t an integral part of the business of managing the business.

For the business striving to reach the next level, the “plan” is just a starting point.  As new information comes in through actual performance, changes in regulations, economic conditions, or any number of variables, the “plan” is updated to take the new information into consideration.  The original plan remains as “a stake in the ground” and serves as a basis for forecasting and comparing performance based upon new information, actual results, and prior objectives.

Here’s an example of the ways a sales budget can be used:

1

2

3

4

5

6

7

Month

Budget

$ Sales

Actual

O/(U)

Revised

“Plan”

w/ Actuals and No Other Adjustments

New Forecast

Incorporating New Information and Holding Annual Target

New Forecast Revising Down the Annual Target – Based on 1st 4 Mths Performance

January

10,500

8,000

(2,500)

8,000

8,000

8,000

February

12,000

10,500

(1,500)

10,500

10,500

10,500

March

12,500

12,000

(500)

12,000

12,000

12,000

April

14,000

14,500

500

14,500

14,500

14,500

May

20,000

20,000

20,500

18,500

June

15,500

15,500

16,000

14,000

July

16,000

16,000

16,500

14,500

August

19,500

19,500

20,000

18,000

September

12,000

12,000

12,500

11,000

October

12,000

12,000

12,500

11,000

November

11,500

11,500

12,000

10,500

December

10,000

10,000

10,500

9,000

Total

165,500

45,000

(4,000)

161,500

165,500

151,500

In the table above:
1.    The budget/plan year is January through December.
2.    The Annual Sales Objective is $165,500.
3.    The new information is actual performance January through April.
4.    Column 2, Budget $ Sales, the plan is broken into monthly performance targets.
5.    Column 3, Actual, shows the actual sales made for January through April.
6.    Column 4 is the variance or difference between the planned sales and actual sales.
7.    Columns 5 through 7 show some alternatives on how to incorporate actual results.

Note that actual results versus plan for January through April (45,000 Actual/49,000 Planned) are about 92%.

The actual results for January through April with no other information have different alternatives for incorporating the information.  Each is equally valid and results from the “interpretation” of the results.

1.    Column 5 shows the information on a substitution basis.  The actual performance is incorporated into the plan, but no other changes are made to future months.
2.    Column 6 shows the incorporation of actual performance and holding the annual target.  To hold the annual sales objective, the business must increase sales targets for the future periods by $500 each period.
3.    Column 7 shows the reduction of all future periods based upon the “trend” of the first four months average.  The annual sales objective is reduced to approximately 91% of the original sales objective.

The three options above are examples of how a business can use the same information in different ways.  The information used in this example can obviously be used and applied in different ways for different results.  How a business chooses to use or not use new information is based on several factors that include the following:

□    Nature of business
□    Performance in prior years
□    Type of business
□    Industry
□    Outside influences
□    Regulations
□    Business Practices
□    Management Objectives
□    Skill set
□    Organization capability
□    Other items

It is important for every business to understand that how new information is used or not used to influence or change operations against a plan (formal or informal) will impact how the business performs.  Recognizing the reality that business projections may need to be revised downward is certainly valid.  Revising them too far down may result in an organization that doesn’t maximize the opportunities that are available.

The opposite is also true.  When a business is consistently outperforming projections, then revising the objectives upward may be desirable.  Revising them to unrealistic levels may cause the organization to stop trying.

“Moving” targets are certainly an option that needs to be considered.  Understanding the impact on the organization when targets are moved is critical to the organization’s ability to maximize performance.

Copyright 2005 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

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