ENTREPRENEURSHIP / SEP. 13, 2014
version 3, draft 3

How to Measure Business Performance

Starting and running a business is all about success, growth, and expansion. You can look at the numbers, but how do you know exactly how your business is doing? How do you measure it’s success? As your business grows, it’s crucial that you monitor and manage your business so that you can make the best decisions possible.

If you put business performance measurements in place, then you can effectively keep track of your business. Based on this information, you can stay on track regarding expansion plans. Growth is vital to any successful business, so it’s important that you measure its performance. What is working? What needs to change? If you closely monitor various areas of your business, you’re much more likely to be successful.

Benefits to Measuring Business Performance

When you measure your performance, you are contributing to the growth process. There are a variety of benefits including:

1.       The ability to know how the different areas of your business are performing. When you have a good measurement system in place, you can examine the exact triggers regarding any change. Once you see what is directly affecting your business, you can be more proactive.

2.       Measuring business performance allows you to focus on more than just your financial state. Although financial measures are the most commonly used, non-financial measures are just as vital. For example, your business may be negatively affected by poor customer service. This may be measured through the number of complaints.

3.       Knowing where to reward and where to discipline. If a certain employee is responsible for the majority of your customer service complaints for instance, this can be investigated further.

4.       Through business performance measurements and management, you will have greater control over your business. When you have greater control, you’re able to improve your business more effectively. This will help you maximize your efforts.

 Stages of Business Performance Management

In order to effectively measure the performance of your business, you need to manage it appropriately. There are seven stages regarding this management. The higher you are on this level scale, the more benefits you will achieve.

1.       Level One is NO DATA: This is when a business has little or no data regarding business performance. These businesses never create measurement systems, failing to collect and report any information.

2.       Level Two is DATA and FACTS: This is when a business has some data and information, but fails to use it effectively. This seems to be common, as data is not hard to collect. It’s what you do with that data that’s important. If you do not analysis or report the data, how can you come up with an effective decision? At this level, a business recognizes the usefulness of data, but has not put effective systems into place.

3.       Level Three is INFORMATION: This is a fairly common level, as businesses do collect and report data. Although they do produce performance reports, the insights are generally limited. Data is recognized as useful, but it is often collected wrong or fails to generate useful insights.

4.       Level Four is OPERATIONAL INSIGHTS: This is the first level where data yields real value. The data is used to improve decision-making, improving the way they operate. Although data is collected, the scope tends to be fairly small. There is sometimes a disconnect between a new strategy and operations.

5.       Level Five is STRATEGIC INSIGHTS: This is similar to level four, but at this level, businesses report strategic performance data. Meaning, they use information that will improve decision-making, but they’re still not relating it to operational performance.

6.       Level Six is STRATEGIC and OPERATIONAL KNOWLEDGE: At this level, businesses use both performance data and gain required knowledge regarding operational decision-making. The difference between this level and level seven, is that data is reported on the past. There is no prediction regarding the future.

7.       Level Seven is STRATEGIC FORESIGHT: This is the best possible scenario regarding business performance measurement systems. Data is used to make both operation and strategic decisions. This is not only in terms of present decision-making, but the data develops predictions for the future. For example, businesses at this level will typically make use of ’what-if studies’ and ’scenario-mapping.’ Businesses at this level use their data to generate true advantages, so that they’re able to make better decisions.

 How Do You Know What to Measure?

It can be challenging to know what to measure. You need to focus on quantifiable factors, which are clearly linked to your success. These are specifically known as ’key performance indicators’ or KPIs. As mentioned above, quantifiable does not necessarily mean financial. So, what do you measure?

1.       Key Business Drivers: Your business performance measurement will be most successful if you focus on the areas that determine whether or not your business will be successful. Each business will differ from the next. So look at what brings success to businesses like yours. If you own a factory for example, it’s possible that you are shipping out products in high volume. In this case, you may focus on production speed. Have you had complaints about defects? Focus on what is causing these errors. If you begin to acknowledge what it is you need to change, your business will be positively impacted.

2.       Specific Measures: You may have chosen your drivers, but how do you measure them? Focus on what determines the success of your business. If customer satisfaction is one of your priorities, focus on the ways you can measure this. How many products have been returned in comparison to your sales? How many complaints have you received? How long does it take for a customer to receive their product? You need to find which measures will help you improve your business.

3.       Select Your KPIs: Your key performance indicators should be quantifiable, meaning they should be reduced to a number, and they should be linked to your business driver(s). They should be directly related to the goals of your business, and be associated with the aspects of your business that you can control.

4.       Utilizing Your KPIs: The whole point to business performance measurement, is improving performance for the future. First, you can use your KPIs to target problems. Since your KPIs tell you what is going on within a specific area, you can easily follow trends. If trends are moving in a negative direction, you know that something needs to change within that area. This helps to not only solve problems, but bring new opportunities. The more detailed and thorough you are, the easier you will find your management tools are to use. For this purpose, there are computer-based information systems available.

5.       Measure Your Financial Performance: It is important to measure your profitability, as increased profits is generally a targeted goal. You need to be familiar with a variety of measures. For example. ’gross profit margin’ or ’net profit margin.’ It’s important that you know the difference. Gross profit margin is the proportion of money left over once the cost of goods is taken into account. This is calculated as REVENUE- COST OF GOODS divided by the REVENUE. Net profit margin on the other hand, takes all costs into account. Not only is the cost of goods included, but all overheads as well. This is anything from tax payments to interest.

So, identify your goals. Write down as many goals as possible, what are you looking to achieve? Develop your key performance indicators, focusing on your businesses strengths and weaknesses. Choose your specific measures, you can look at your competition as well. Once you have chosen your objectives, you can focus your KPIs around them. Begin collecting and reporting your data. Focus on the most important aspects, then make the necessary changes.

Photo credit: tleecorp

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