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how are budgets used as a tool for performance evaluation well to begin with one of the core functions of management is planning part of that planning process is to allocate resources ingly based upon the needs of the organization or that segment of the organization so budgets do just that they plan for the needs of the organization based upon given objectives or goals that that unit or that organization will seek to achieve and the allocate resources to those objectives the budget allocates a specific thing dollars which is representative for Value those dollars can be used again towards a specific task or function now when we are measuring performance as a result oftentimes the budget is a good indicator of some aspects of performance so with that being said what are some key performance indicators or metrics that we can use one that relate to the budget or in the budget itself act as a performance indicator well to start with budget variants how far the budget varies from the expectations of resource needs if it's if the budget is way over what is needed generally the budget will be cut in future years but generally that's a sign that planning was done poorly the same goes for if you run over your budget which is generally worse and more common whereby you did not allocate enough resources to achieve the objectives that you identified or you did not operate efficiently enough to achieve those objectives when that was at an otherwise reasonable goal or aspect one element of budget is paying for individuals that that is individuals on payroll sometimes when there is not uh ongoing or long-term need for individuals on the payroll uh many contractors or part-time individuals be will be used for that function so the payroll head count ratio was simply a ratio of full-time workers to Total workers on a given project as part of a budget so once again that's a resource allocation function that can be a good indication and is covered in the budget as well for performance okay operational cash flow well any aspects that generate income for the business that relate to operations is your operational cash flow right any income or revenue generated from operational activities well the elements covered in a budget relate very closely to the operational activities so it gives a good indication of what the return of Revenue was based upon in the allocation of resources in the budget okay next current ratio this is your current assets to current liabilities where this is primarily a balance sheet ratio because current assets and current liabilities are recorded on the balance sheet it also relates very strongly to the budget in that it identifies once again the changes in the ratio between your current assets and your current liabilities and how that related to the performance of a individual unit that is producing Revenue so this relates back again to your operational cash flow so if you incurred liabilities more than current assets then this could give some level of indication of how the budget was made efficient efficiently and it could relate once again to the overall objectives that you hope to achieve from the budget okay quick ratio once again this is current asset uh over liabilities but current assets you're removing inventory and prepaid expenses because once again these are not quite as liquid as others so it goes to the same point of using the current ratio okay burn rate burn rate is how quickly you are spending money okay how quickly you're burning your resources where your budget should account for or allocate what how you're going to use your resources particularly your money towards a specific achievement of our goal of our objective so your burn rate should match closely to what you've planned for or projected in your budget if it doesn't that again can be a performance metric uh net profit margin okay this is an income sheet type of of metric but net profit compared to total revenue once again uh how it relates to the budget the budget is going to allocate resources uh and it is going to relate strongly to how much revenue is coming in how much revenue is produced from the activities at hand and it the budget is going to most strongly account for the cost drivers there so net profit is going to be a combination of Revenue and your costs well the budget should allocate the expenditures so you can identify once again whether it is the costs that are affecting that profit uh as compared to revenue so once again the net profit margin is a useful figure in long-term planning and long-term budgeting in the organization gross profit margin this relates very strongly again to net profit margin because once again instead of net profit you're using the cost of goods sold which is just one single cost factor that once again should be accounted for in the budget working capital this is again a a balance sheet ratio where current assets are subtracted from current liabilities so you know how much Capital you have to cover your expenses well in creating a budget you have to know what you're working with so if it is an operational budget that you're creating the amount of working capital that you have is going to determine the amount of resources that you can allocate to different functions so once again this is an important metric to Performance and how the overall budget covers the needs or objectives of the organization inventory turnover this is again one of those asset based metrics that can be relevant to the budget because again if the budget includes the repurchase of inventory that is to meet the needs of you are going to budget for a certain amount of inventory purchase over a given period to keep up with so these metrics relate closely to the overall performance and how you would evaluate performance of different segments or the overall organization