Using your budget to measure performance
Your business budget can also work as a financial action plan. Budgeting can:
- show the costs and revenues for each of your activities
- provide information and support management decisions throughout the year
- be a way of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income
Comparing your business budget year-on-year with your actual performance can be a good way of benchmarking how your business is performing. For example, you can compare your projected figures with previous years to measure your performance.
You can also compare your figures for projected margins and growth with those of other businesses in the same sector, or across different parts of your business.
Key performance indicators (or 'KPIs')
To improve your business's performance, you need to understand and monitor your key drivers. There are many factors affecting every business's performance, so it's important to focus on a handful of these and monitor them carefully.
The 4 key drivers for most businesses are:
- margins (how much money you make on products and services)
- working capital
Any trends towards cashflow problems or falling profitability will show up in these figures when measured against your budgets and forecasts.
If you calculate key performance indicators regularly, it can help you spot cashflow and profit problems.