The budget cycle is a key moment for companies, as it determines for a large extent where your resources will be allocated. Therefore, it is crucial to set realistic and feasible targets at the beginning of the budget process. Find out how to set the right targets and avoid common mistakes when setting growth targets.
What is the budget cycle?
The budget cycle provides a roadmap for how the company's resources will be allocated in order to accomplish strategic goals without going over budget. C-Level Management needs to understand where their company can become stronger, to set the right strategic ambitions and be more competitive. One of these ambitions can be to increase growth. Many executives are fond of promising to deliver growth, but far fewer realize those ambitions.
This is because many fundamentally mismanage the difference between their growth goals and what their base businesses can deliver. But how can you avoid that mistake and make sure that you set the right growth and profit targets that fit your company’s strategy?
Common mistakes when setting growth targets
When setting growth targets many are led by unrealistic assumptions about their business. This is largely due to mismanaging of the growth gap, the difference between aspirations and what the company can deliver. Benchmarking helps to objectively validate your decisions and determine the right focus. Imagine your company strives for more growth. You might be happy with setting a growth target of 5%, but a benchmark shows that key players in your industry are growing by 10%. Therefore, setting a higher growth target is necessary to stay competitive. This shows that it is crucial to not only look at your own performance but also at the competition.
Another pitfall during choosing growth targets is assuming that all growth is linear. In reality growth is non-linear and sometimes even exponential. Growth might be slow at the beginning of new projects or fluctuate depending on supply shortages or price inflations. Thinking non-linear about growth can close the growth gap by thinking more realistically about when targets can be reached.
How to grow and set the right targets
To set realistic growth targets it is most important to look at the growth trends of your company, the market and your key competitors and compare them to your numbers. This way you know in which areas your company is winning compared and where you have potential to improve. Think of the main metrics during this process that are Net Sales Growth, Gross Margin, EBITDA, EBIT and Return on Assets.
How can benchmarking help?
It can often be difficult for companies to determine what an attainable yet ambitious growth level is to gain a competitive advantage. Therefore, it is important to set strategic ambitions that fit the areas in which your company can improve. Benchmarking helps determine the right growth ambitions, in perspective of the market and allows you to see in what areas you are doing well as a company, and where you should focus on improvement to close the growth gap. Skip assumptions and unrealistic conclusions and substantiate your targets with data based insights about your own and your competitors growth.
Do you also want to apply benchmarking in your budget cycle to set more realistic growth targets? Have a look at our free benchmarking whitepaper.
