How to Measure Business Performance in 3 Steps
To measure business performance, you need to track relevant business metrics, also known as key performance indicators, that display a measurable value and shows the progress of the business goals.
Measuring performance is a vital part of monitoring the growth and progress of any business. It entails measuring the actual performance of a business against intended goals. Regularly checking your business performance protects your business against any financial or organizational problems. It helps businesses in lowering process cost and improving productivity and mission effectiveness.
What this article covers:
How Is Performance Measured?
The constant changes in the market conditions mean that it’s essential to constantly track and review your business goals and performance to remain competitive.
What are your trying to achieve? Your goals might be acquiring new customers, improving customer satisfaction and generating high volumes of traffic to your website. Until you don’t know what you want to measure, you can’t measure what you have.
Here are examples of business goals:
- Lead generation
- Increasing sales
- Better customer service
- Increasing profit margin
- Increasing production efficiency
- Capturing bigger market share
From the goals, establish critical success factors. The CSFs refer to specific conditions the key activities that a business should focus on to be successful.
Develop Key Performance Indicators
The KPIs are standard ratios that provide insight about your business performance. Examples include revenue generated per employee or financial statements. These performance indicators help you measure performance against the goals you’ve identified.
Setting the KPIs will vary between businesses. It is important to choose KPIs that mean something to your business, that can be measured and provide outcomes to achieve your goals.
Define Suitable Metrics
Business metrics are quantifiable measures that track and assess the status of a specific business process. Depending on your business and your goals, you may want to focus on certain metrics. These include marketing metrics, sales metrics, accounting and financial metrics and online metrics.
These metrics keep business owners, employees, investors and customers informed and aware of how a company is performing.
Track and Measure
Narrow down on the information that you think is crucial to track. Choose a few major business goals, develop related KPIs and focus on tracking and collecting relevant data.
How Do You Obtain KPIs?
Business performance measurement is about finding the right KPIs and putting them to use to improve organizational or business performance.
- A clear one-page strategy acts as a starting point for defining your objectives and designing appropriate KPIs
- Identify the questions you need the answer to. By linking your KPIs to your strategy, you can sharpen your focus and make the relevant KPIs more obvious
- You need to outline your data requirements to establish what metrics or data you need in order to answer those questions
- Once you know what information you need to collect, you need to find the right measurement methodology to get it
- You need to assign ownership of the KPIs for interpreting its meaning, monitoring how it’s changing and deciding what that means for the business.
- Communicate your KPIs so they’re understood by employees, investors and other business stakeholders
- Review the KPIs periodically to make better business decisions and gain competitive advantage
What Does a KPI Measure?
Businesses set KPIs to measure their success at reaching targets. They demonstrate how effectively a business is achieving its key objectives. They can span across industries, departments or individual tasks.
Once you’ve set your KPIs, you can set appropriate goals, develop strategies to reach them and evaluate your progress, and eventually have a historical record of your business performance. Businesses measure both financial and non-financial KPIs.
Measuring Your Financial Performance
Reviewing your financial performance can help you check your business goals and plan effectively for improving the business.
When conducting a financial review of your business, you might want to consider assessing your business cash flow, working capital, cost base and growth. Other key financial ratios are efficiency ratios, sales growth, liquidity ratios and financial leverage.
The target for most businesses is an increase in profits. The key metrics to assess profitability are:
- Operating margin
- Gross profit margin
- Net profit margin
- Return on capital
Measuring Customer Loyalty and Retention
The more you know about what your customers need, the easier it’ll be to handle increased numbers of customers. To capture customer feedback, you can use sales data, complaint forms, questionnaires and social media.
Collecting feedback from customers helps to identify where improvements can be made to your products or services.
Employee Performance Measurement
Evaluating the performance of employees from a financial perspective can be a very valuable management tool. The most commonly-used metrics to assess employee performance are sales per employee, contribution per employee and profit per employee.
Benchmarking is a useful way of comparing yourself to businesses in the same sector. It’s important to note that your end goals and market position will affect the specific comparisons you want to make.
The competitor information that is useful to your business depends on the type of business and the market you’re operating in. The key questions to ask are who your competitors are, what they offer, how they price their products and services, what are their competitive advantages.
It is useful to do a SWOT (strengths, weaknesses, opportunities and threats) to find out more about what your competitors are saying about themselves and what others are saying about them.
Having a process in place to regularly monitor and measure business performance can help business owners identify best practices and create strategies to foster business growth.