A key performance indicator, or KPI, for budgeting can be an effective tool to keep track of a company’s financial health. KPIs are measures by which a company can monitor its progress throughout a specified period of time. By closely managing budgets to achieve a KPI target, a company can reduce unnecessary spending and improve its bottom line. KPIs also help a company plan future spending.

Measure It

An effective KPI is measurable and consistent. It includes a metric and a target. The metric indicates the numeric measure that’s being tracked, such as dollars spent or percentage of budget overage. The target indicates the goal the company is striving for, such as “a 10 percent decrease.” By creating quantifiable budget KPIs using metrics and targets, a company can better measure its success and take corrective action quickly.

Hold Employees Accountable

Using a KPI for budgeting makes people accountable for the success or failure of this aspect of a business. By monitoring the financial performance of a company during the period set forth in the KPI, managers can make adjustments to business practices before it’s too late. When people are held responsible for KPI results, it’s more likely that they’ll work harder to achieve them.

Manage Spending

KPIs can help control spending. By managing a budget to a KPI target, a company can monitor spending and reduce expenses. This measurement can serve to help a company decide whether or not to move forward with specific spending activity. If the transaction doesn’t align with the goals set forth in the KPI, it may require further proof of feasibility. KPIs can also help financial departments align with other company goals.

Forecast Accurately

Watching and documenting the trends of a business is instrumental to its future success. If a KPI is based on financial information from a prior period, it can help a company forecast future results with greater accuracy. By setting higher goals based on past performance, a company can use historical data as a benchmark for future goals.

Set Achievable Goals

KPIs for budgeting help companies direct their efforts toward specific goals. If the indicators are too far out of reach, they’re ineffective. If they’re too easily accomplished, they lose their meaning. When they’re well-developed, they can serve as guides to steer financial decisions during a specified period of time. By making them attainable with reasonable effort, they’re effective tools for mobilizing staff members to work together to reach common goals.