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How to Measure Performance in Business: Tools & Examples

Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

How can you measure performance in your business, and why would you want to do so? In this lesson we'll discuss common tools for performance measurement, why you'd use them, and what to do with the results.

How Can We Measure Performance of a Business?

Sometimes business owners and managers get so busy working in their business that they forget to stop and analyze what is working and what the company can do better. In this lesson we'll look at some ways a business owner or manager - we'll call him 'Joe' - can monitor his business performance, so that issues and opportunities can be addressed before they negatively impact the bottom line.

Here are several tools Joe can use to measure performance of his company:

Budgets

Budgets are one of the best known performance management tools. They can be as simple as a revenue and expense goal that the business compares actual results against each month.

Many businesses do very detailed business plans, which allows them to measure the impact of specific things that happen on their bottom line. A well-designed plan will have expectations in terms of employee productivity (especially in the sales department), customers and their buying habits, expenses needed to support the business, staffing requirements, and anticipated large capital expenditures.

These detailed plans are generally compared to monthly and year-to-date financial reports, and variances are identified and analyzed. Joe, for example, might notice that revenues last month are lower than anticipated. He can then dig into the specific details, and find that sales of Product B are lower than planned, and the selling price is also lower than expected. Armed with this information, he can go and speak to the sales team and try to determine why Product B isn't selling at the levels anticipated. Once he has some idea of what's happening, action can be taken to try and generate more sales of Product B - or to revisit the budget and redesign plans based on new assumptions.

Metrics or KPIs

Metrics or key performance indicators (KPIs) are standard defined numbers or ratios that can be compared to company performance. Examples might be sales quotas or revenue generated per employee.

The specific metrics used in a company depend on the business drivers. In an auto repair business, for example, important metrics might include average revenue per job and jobs completed per service technician. A change in either of these can lead to a dramatic increase or decrease in revenue for the shop.

When Joe is determining the metrics to use in his performance measurement, he should start with the biggest cost and revenue areas of the business. Once he finds them, metrics can be developed around those areas to provide indicators of current results. For instance, If Joe's business is a consulting company, he will probably need to measure billable hours per consultant, or number of jobs per employee. If Joe's business is a restaurant, he will probably need to measure seats per day, and revenue per seat.

Once the metrics are determined, they should be calculated and reviewed regularly to watch for problems and trends.

Comparative Ratios

Comparative ratios are metrics or KPIs for groups of companies or industries. A specific company can compare its results to these ratios, to see if it is performing better or worse than its competition. Industry performance information is available from many published sources, including the U.S. Government.

To return to Joe - he might locate industry performance information online, and incorporate those ratios into his monthly reporting, to see how his company lines up against others in the same field.

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