Let’s not delve into mission and vision—let’s assume you’ve already gone through those strategic stages. Regardless of your business field, goal setting follows several key principles. These principles will help you create an effective and manageable goal-setting system:

• Hierarchy: Goals are set for each level of responsibility within the organization.
• Nested structure: Lower-level goals are components of higher-level goals.
• Consistency: All goals should complement each other and not be contradictory.
• SMART: Each goal must be formulated according to SMART principles (Specific, Measurable, Achievable, Relevant, Timed).
• Impact: Achieving each goal should have a direct or indirect impact on the company’s final profit.
• Accountability: Each goal must have a specific responsible employee assigned to it, even if achieving it requires the work of the entire team.

Now let’s take a closer look.

Goal Hierarchy: From Strategy to Action

Imagine you assign an economist the task of reducing the financial cycle from 80 to 60 days by May 31st. This is not a task for just one economist! Rather, it’s a shared goal for the top management team: the commercial director (responsible for accounts receivable), the logistics director (responsible for inventory and accounts payable to suppliers), and the finance director (responsible for financial operations and accounts payable to banks).

If we leave aside the subtleties of staffing structures and look at the essence, it becomes clear: any company strives to generate profit, confirmed by free cash flow. This drive leads to the formulation of the main goal — the top-level goal, or “Level 0”. This goal is set for the company by its owner. There may be other goals at this level, but they will always be secondary to the main one.

In order to achieve the “Level 0” goal, the company must also achieve the goals at the business function level — “Level 1”. What are business functions? These include, for example, sales, marketing, logistics, financial accounting and planning, security, production, and so on. These are the functions necessary for the company to fulfill its purpose.

Example:

“Level 0” goal: Achieve a monthly profit of $1000 and have $1000 in the account that can be freely used without the risk of a cash gap.

To achieve this goal, the “Level 1” goals (business function goals) may be as follows:

• Sales function: Ensure sales volume of at least $10,000 with a margin of no less than 30% and total accounts receivable not exceeding $15,000.
• Other functions: Expenses, including taxes and depreciation, should not exceed 20% of income.

Next, to achieve the “Level 1” goals, it is necessary to accomplish the goals for business processes — “Level 2”. For example, to meet the sales function goals, the following business processes are needed:

• Customer base development
• Increase quantitative distribution
• Increase qualitative distribution
• Accounts receivable management

Or for the marketing function:

• Assortment development
• Market research
• Organization of BTL campaigns
• Organization of ATL campaigns

As you may have already guessed, achieving the goals of “Level 2” is accomplished by fulfilling the goals of procedures — “Level 3”. A procedure is a sequence of actions performed by one or more employees within a business process. For example, for client base development:

• Analysis of sales by product assortment.
• Analysis of competitors’ sales.
• Analysis of trends in market conditions.
• Conducting a comparative analysis of consumer characteristics.
• Development of recommendations and proposals.

And achieving the goals of “Level 3” is accomplished by fulfilling the goals of specific actions and operations — “Level 4”.

The nesting principle: From operation to profit

So, the complete picture: to achieve the goals of “Level 0,” you need to accomplish the goals of “Level 1,” which, in turn, are achieved through the goals of “Level 2.” For this, you must accomplish the goals of “Level 3,” and these are the result of achieving the goals for each action or operation of “Level 4.”

Of course, each company has its own set of business functions, processes, procedures, and operations. But essentially, there are always five basic goal-setting levels. How deeply you are ready to detail your planning depends solely on you and your automation capabilities. After all, at “Level 0” there are a few goals, at “Level 1” — dozens, at “Level 2” — hundreds, at “Level 3” — thousands, and at “Level 4” there could even be tens of thousands.

It is very important to follow the principle of nesting. From “Level 4” to “Level 0” there should be a clear logical connection. The sum of the results at a lower level forms the result at a higher level. If you find operations, procedures, or business processes whose results are not necessary for achieving any higher-level goal, think twice! Most likely, this is redundant—something that drains your company’s resources without contributing to the achievement of the main goal at “Level 0”.

Goal alignment: Do no harm!

Goals should be aligned. This means that achieving one goal should not hinder or prevent the achievement of any other goal.

Example: The CFO sets a goal to reduce the financial cycle by 10% by the end of the reporting period. He assigns tasks to the commercial director (to reduce accounts receivable) and the logistics director (to reduce inventory). The calculations have been made, the tasks assigned, and everything seems correct.

But! Accounts receivable are formed from unpaid shipments to clients. Contracts with clients specify and agree on payment terms. If the current level of accounts receivable complies with these terms, then to reduce it, the commercial director would have to either renegotiate payment terms ahead of schedule or stop working with clients who have the longest payment delays.

Both options negatively affect the commercial director’s goals of meeting the sales plan and ensuring the required level of marginal profit. Why? Negotiations to shorten the payment term will likely require compensation to the client (for example, an additional discount), which will reduce marginal profit. The client, despite the discount, may transfer part of their purchases to a competitor who is less strict about payment terms, which will decrease sales volume. Refusing to work with clients who demand the maximum payment delay will certainly reduce receivables, but will also lead to decreased sales, profitability, and, ultimately, profit.

By understanding the principle of alignment, it is important to be very careful when choosing the ways to achieve your goals.

SMART Goals: Clarity and Measurability

A thought, idea, request, or expectation becomes a goal when it is formulated according to the principles of SMART:

• S (Specific): The wording of the goal must be clear, clearly describing what you want to achieve.
• M (Measurable): The result must be measurable. You should have an established measurement method and appropriate tools.
• A (Achievable): The goal must be realistic. At the time of formulating the goal, you must be confident that it is achievable and understand what efforts you plan to make to achieve it.
• R (Relevant): Achieving the goal should be relevant and necessary for you within the set deadlines. Trying to achieve something irrelevant is a waste of time and resources.
• T (Timed — Time-bound): The deadline for achieving the goal must be clearly defined.

An example of a SMART goal for the sales business function: Achieve a 1% sales increase by selling 4 new products to category A clients, specifically: ensure sales of at least $10,000 during the month of May.

Impact on profit and responsibility

As already mentioned: if achieving certain goals does not affect the achievement of the ‘Level 0’ goal, or you cannot establish cause-and-effect links of this impact, think twice! most likely, you are setting irrelevant goals that do not help you achieve the main goal.

And, of course, a mandatory condition is having a person responsible for achieving each goal. And not just anyone responsible, but someone responsible who is vested with the necessary amount of authority. This is important! To ensure that appointing a responsible person does not simply make them a scapegoat, you need to make sure that the employee understands what is required from them and has the opportunity to use the resources necessary to achieve their goals.

• The achievement of the ‘Level 0’ goal is the responsibility of the CEO to the owner.
• Achievement of ‘Level 1’ goals is the responsibility of heads of business functions (top managers) to the CEO.
• Achievement of ‘Level 2’ goals is the responsibility of department heads to the heads of business functions.
• Achievement of ‘Level 3’ and ‘Level 4’ goals is the responsibility of specific lead specialists, specialists, and performers to their immediate supervisors.

As a result, a very clear system of interrelated, coordinated, and properly formulated goals is established. Each goal has its own responsible employee, whose performance is based on the completeness and timeliness of achieving results for the goals they have accepted and for which they bear personal responsibility.

Using this approach, it is quite easy to build a reporting system that will show progress at each level of goal-setting and help make timely managerial or corrective decisions.