Budgeting Overview

Print this page

Evaluating management's performance

Budgets can provide essential tools for measuring management performance. By comparing the actual results to the budget over a period of time, an evaluator can determine a manager's overall success in achieving his or her department's strategic goals.

Because actual results may differ from budgeted results due to reasons beyond an individual manager's control—such as an overall downturn in the economic cycle or an unexpected spike in prices of raw materials—performance evaluations should be matched to appropriate measures of results.

Some financial measures of performance include:

  • Gross margin measures profitability after direct production costs but before other costs that are not specifically tied to production, such as marketing, administrative, and interest expenses.

    Gross margin = $40,000/$120,000 = 33%

  • SG&A (selling, general, and administrative costs) as a percentage of sales is a measure of an organization's effectiveness in controlling costs.

    SG&A as a percentage of sales = $20,000/$120,000 = 16.7%

  • Revenue per employee is a measure of the operational efficiency of an organization, relative to other companies in the same industry.

    Revenue per employee = $120,000,000/225 = $533,333

Click here to exit the program. Warning, this will close your session. You will be able to return to the course, but any evaluation of your progress/performance will not count after you have clicked this button.