How do you select the best financial performance analysis metrics for your budget and forecast?

1 Align with your goals

The first step is to align your metrics with your strategic and operational goals. You want to choose metrics that reflect what matters most to your business, such as revenue growth, profitability, customer satisfaction, or market share. For example, if your goal is to increase your profit margin, you might use metrics like gross margin, net margin, or return on equity. If your goal is to improve your cash flow, you might use metrics like operating cash flow, free cash flow, or cash conversion cycle.

2 Choose relevant and reliable data sources

The second step is to choose relevant and reliable data sources for your metrics. You want to use data that is accurate, timely, and consistent, and that covers the aspects of your business that you want to analyze. For example, if you want to measure your sales performance, you might use data from your CRM system, your accounting system, or your market research. If you want to measure your operational efficiency, you might use data from your production system, your inventory system, or your quality control system.

3 Use a balanced mix of metrics

The third step is to use a balanced mix of metrics that capture different dimensions of your performance. You want to avoid relying on a single metric that might not reflect the whole picture, or using too many metrics that might confuse or overwhelm you. A common framework for selecting a balanced mix of metrics is the balanced scorecard, which divides your performance into four perspectives: financial, customer, internal process, and learning and growth. For each perspective, you can choose a few key metrics that align with your goals and data sources.

4 Compare with benchmarks and targets

The fourth step is to compare your metrics with benchmarks and targets that help you evaluate your performance. Benchmarks are external standards that you can use to measure how you are doing relative to your industry, your competitors, or your best practices. Targets are internal goals that you set for yourself based on your budget and forecast. For example, you might compare your revenue growth rate with the industry average, or your customer retention rate with your target value. By comparing your metrics with benchmarks and targets, you can identify gaps and opportunities for improvement.

5 Monitor and communicate your metrics

The fifth step is to monitor and communicate your metrics regularly and effectively. You want to keep track of your performance over time, and report it to your stakeholders, such as your managers, employees, investors, or customers. You can use various methods to monitor and communicate your metrics, such as dashboards, reports, charts, or presentations. The key is to make your metrics clear, concise, and actionable, and to use them to support your decisions and actions.

6 Review and update your metrics

The sixth and final step is to review and update your metrics periodically and adapt them to changing conditions. You want to make sure that your metrics are still relevant, reliable, and balanced, and that they reflect your current goals and data sources. You might need to modify, add, or remove some metrics based on your feedback, results, or new challenges. By reviewing and updating your metrics, you can ensure that they are always aligned with your budget and forecast, and that they help you achieve your desired outcomes.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?