Why measure performance?
How do you measure your business performance? Do you have finely tuned measures in place which tell you whether performance is on track? Or do you run your business based purely on the level of cash in the bank? This newsletter talks about why to measure, what to measure and the ultimate result of measurement.
So why should you measure your business performance? Firstly you should measure so that you improve the overall business performance, increasing the profit levels and so allowing better short term and long terms rewards. Secondly the right measurement, by way of accurate management information should inform your key business decisions, for example where to target growth or which product or service line is most profitable?
So what to measure? ‘What gets measured gets done’ is often quoted and usually true. Many organisations adopt a basket of measures across the business, often referred to as a balanced scorecard and this can be effective. Assuming you have already developed your business strategy, this then needs to be translated into objectives which are measurable and owned. The key areas to focus on are:
Customer – Identify the characteristics of your ‘ideal customer’ and then think through the key steps to achieving the right customer growth. Then determine the appropriate measures of each step. For example you might measure prospects and conversion ratios into customers, as well as your committed order book.
Operational – Achieving good customer growth is good but completely let down if your business delivery is not up to scratch. So seek feedback on ‘Are customers getting what they want when they want it?’ is crucial. Also you can record customer complaints and monitor trends to boost customer satisfaction. Other typical operational measures are employee satisfaction and product or service quality.
Financial – Top line growth which is not profitable only results in busy fools! You can avoid being a busy fool by making sure that Sales growth is profitable growth, and here monthly management information (particularly profit analysis) is essential. So measuring margins, profitability, overheads and cash flow are basic first steps in transforming your finance function.
Growth – What are the long term measures which will track your ability to achieve sustainable and profitable growth? As well as profit measures the growth measurables often include measures of scalability such as capabilities and retention of employees, range of products and market sector access. Share Options (or phantom shares) can be very effective at helping key manager or employee retention.
The End Result
Most successful businesses have slick Key Performance Indicators (KPIs) which measure their business performance. However a lack of business performance measures will count heavily against you in a business sale situation, as these will be reviewed as part of normal due diligence processes.
One last warning on measures from Albert Einstein:
“Not everything that counts can be counted, and not everything that can be counted counts”
Why not talk to us about your business measures and how we can help you make them work for your business? If you would like to discuss any matter raised in this newsletter then please do contact us.