Key performance indicators (KPIs) for budgeting and forecasting can help small and large organizations gain quick insights into their internal operations. KPIs are critical for tracking revenue, profits, and performance in any business.
Budgeting and forecasting KPIs allow managers to understand the company’s financial health better. It also makes it easier to track and monitor its operational efficiency.
However, businesses must first understand the various financial KPIs and how to track profitability accurately.
KPIs provide metrics that determine whether departments meet the necessary benchmarks to remain profitable. Relevant KPIs include potential sales leads, average sales per cycle, and conversion rates. These metrics assess how healthy sales processes perform, allowing teams to make adjustments as needed.
On the other hand, KPIs have an impact that extends far beyond sales into forecasting and budgeting departments. Forecasting software can predict future sales, consumer demand, and traffic based on precise indicators, helping teams to optimize procedures.
Finance professionals can use forecasting tools to establish budgets to reduce expenses like lead costs and boost profit margins.
In the absence of relevant KPIs, budgeting and forecasting rely on guesswork to develop plans for internal departments. This could result in inefficient operations and spending, putting the company’s finances at risk.
The following are budgeting and forecasting KPIs that help generate specific business insights.
1. Cash Flow from Operations
Operating cash flow is the entire amount of capital generated by your daily internal operations (OCF). That is, whether the company has adequate capital to expand or cut costs to increase cash flow.
When updating net income, OCF is calculated by taking depreciation, inventory expenses, and accounts receivable into account. When businesses evaluate their OFC, they should compare it to the total capital used to determine whether processes can be profitable in the long run.
2. Present Ratio
The current ratio determines whether or not a company can meet all of its annual financial obligations. This KPI considers the company’s incoming and outgoing payments, such as the accounts payable and receivable departments. The current ratio is calculated by comparing revenue spent and revenue generated.
A healthy current ratio ranges from 1.5 to 3, indicating that organizations can meet their obligations given their average cash flow. Businesses with a constant current ratio of less than one cannot fund mandatory expenses unless they generate additional revenue. If the balance is too high, the company has too many assets and isn’t investing enough in business expansion efforts.
3. The Quick Ratio
The quick ratio, also known as the acid test, determines whether an organization has enough short-term assets to cover upcoming liabilities. While similar to the current ratio, the acid test provides a more comprehensive picture of a company’s overall financial health because it considers assets such as stock into liquid.
(Cash + Accounts Receivable + Short-Term Investments) / Current Liabilities = Quick Ratio
4. Burn Rate
The burn rate shows a company’s weekly, monthly, quarterly, or annual expenditure patterns. This trend determines a company’s operational costs. This KPI is particularly beneficial for small businesses that do not require extensive financial analysis.
5. Gross Profit Margin
The net profit margin reflects a company’s ability to generate revenue. While this KPI is typically expressed as a percentage, it indicates how much each dollar of income contributes to their gain. This metric demonstrates an organization’s profitability and can also aid in project scalability.
Net profit margin equals net profit divided by revenue.
Unlike net profit, gross profit margin gauges the pure capital left over after costs of products and services sold. This KPI measures if a company has adequate funds after operating expenses to invest in expansion endeavors.
Gross Profit Margin= Cost of Goods Sold / Revenue
7. Working Capital
The working capital determines whether a company has enough assets on hand to meet its short-term financial obligations. These assets include any liquid credits, such as cash, investments, and accounts receivable, demonstrating a company’s ability to generate some money quickly.
A good working capital KPI ensures that a company has enough capital to cover future liabilities.
Working capital is equal to the sum of current assets and current liabilities.
8. Turnover of Inventory
The inventory turnover rate determines how efficiently a company sells and replenishes inventory over a given period. This directly reflects the company’s ability to generate sales and quickly fill depleted stock.
A company’s inventory turnover rate can be calculated in one of two ways:
Turnover of inventory = Sales / Inventory
Turnover of inventory = Cost of Goods Sold / Average Inventory
9. Budget Variance
Budget variance, commonly used in project management, shows how estimated budgets compare to actual budget totals. This metric determines whether a company’s budgeting is accurate and meets expected revenue and expenses.
A minor budget variance indicates that actual expenditures are equal to or lower than initially projected or that revenue generated is higher than expected. On the other hand, a significant budget variation indicates inaccurate forecasting methods or poor decision-making.
10. Payroll Headcount Ratio
The payroll headcount ratio is a financial KPI that shows how many employees are involved in payroll processes compared to all employees. In other words, this ratio determines the number of full-time employees about the total number of employees in an organization. This metric assists management in monitoring employee turnover and demand in-house.
Full-Time Employees / Total Employees = Payroll Headcount Ratio
Tying It Together
KPIs are an excellent way to monitor internal business processes and operations to ensure quality performance. Businesses can track profitability, sales, revenue, inventory, and expenses by regulating budgeting and forecasting metrics. This feature facilitates evidence-based decision making to promote business growth.
All essential financial KPIs can easily be tracked with Performance Canvas Financials to ensure that your budget remains on track to meet your financial goals for the year. Get in touch with our team today.