1. First, you have to know what is 'reasonable'. In my experience, this is the purpose of forecasting - to find out what is likely to be achieved if things carry on as they are. It's important that the figures are based on reality and so must come from those who are directly responsible for how income is generated and where resources are spent.
2. Next, you need to look at where the market is going and what the organisation could achieve if it 'stretched' itself. This is where stretch targets are set, based on a clear understanding of market forces.
3. The third step is to look at what needs to change in current business processes to bridge the gap between the forecast and the target just set. Ie what processes need to be improved or discontinued, what new processes need to be introduced, and where would the resources they would consume come from. Input to these should come from operational staff to help with ownership of the targets.
4. The fourth step is to assign resources - which for me is the purpose of the budget process. Budgets are set in two parts - the resources required to support 'business as usual ', and the second is to assign resources to the change initiatives identified in the last step. For more detail on this see my previous blog on Continuous Budgeting.
5. Finally, we need to monitor that the change initiatives are being implemented and are on target to deliver the stretch targets. Of course some will be working and others won't be, so the aim here is to find out why and if necessary make changes.Adopting these steps provides organisations with an environment where improved performance can be managed in a collaborative way, rather than relying on hope.