Developing Budgets: What You Need to Know

In a previous blog on Managing Mergers and Acquisitions KPIs, we discussed what exactly key performance indicators are:

“KPIs” are generally defined as quantifiable measures used to evaluate the success of an organization, employee or process in meeting the objectives for performance. In other words, you can only really know if you did well if you know how success is measured.

Such measures provide a company with the information needed to benchmark with another company, compare performance with industry standards and averages, and track any progress in performance improvement over time. By using performance measures, managers and workers understand the outcome of their efforts and how those efforts affect the rest of the organization.

To be meaningful, performance measures must be quantified: an act of measurement is required, one that can be performed reliably and consistently with a basis in fact, not opinion. "Good" and "fast" are not adequate performance measures. "Number of defects" and "time for order processing" are acceptable measures, if they are controllable — that is, if the people performing the work can affect the outcome. In addition to being quantifiable and controllable, performance measures, to be truly effective, must also be:

• Aligned with company objectives
• Supportive of continuous improvement
• Reported consistently and promptly

Measures can be cost-based, quality-based or time-based. Focusing attention simultaneously on cost, quality and time can optimize performance for an entire process and ultimately, an entire organization.

Performance Measures Examples

Cost

• Total cost of financial budgeting and planning as percentage of revenue
• Number of full-time equivalent (FTE) staff, as percentage of total staff, devoted to budgeting
• Number of budgets produced annually
• Number of "ad-hoc" budgets created each year

Quality

• Variance of budgeted-to-actual items as a percentage of budget (there are other measures of quality that companies may want to develop)
• Gap between targeted and actual performance on key measures
• Ratio of expected-to-actual return on capital proposals
• Ratio of failed-to-successful capital proposals
• Percentage of discretionary spending occurring in the last fiscal quarter

Time

• Length of budget cycle
• Average length of time to approve capital budget

To explore these examples in greater detail, view the full Developing Budgets KPIs tool on KnowledgeLeader. You can also access additional benchmarking resources and practical tools on KnowledgeLeader, including:

• Budget Risk Management Essentials
  Assess the impact of your organization’s budget risks with these budgeting tools and best practices.
• Budgeting Leading Practices
  Explore systematic approaches to budgeting that minimize budget risk while ensuring alignment with your organization's strategic objectives.
• Budgeting Process Audit Work Program
  Evaluate your overall process for planning and completing budgeting and determine the effectiveness of compliance with corporate policies and procedures.