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Measuring performance

posted 14 Oct 2010, 21:32 by Leighton Hill   [ updated 14 Oct 2010, 23:55 ]
Too often business owners and managers rely only on financial information to measure the performance of their business. For example, while the profit and loss account is a very important report it may not be a very good measure of performance. Other, non-financial statistics may offer a better insight into how the business is performing.

Unless your business is using a very sophisticated bookkeeping and accounting system, the profit and loss account is unlikely to be of any real use a performance measure. Sure it tells you what profit the business made. But it doesn't tell you how it was made. It doesn't tell you if the profit was reasonable considering the amount of time and effort it took to achieve it. It doesn't tell you if it could have been better and where losses occurred.

Measuring performance is the first step to take on the road to improving your business. Appropriate measures help you understand your business. Even if you have been in business for many years and think you know everything there is to know about your business, unless there you have data to confirm your beliefs you may be mistaken and make poor, or even worse, disastrous decisions.

Any measurement is of limited use unless it can be compared to a suitable benchmark. There are a number of industry benchmarks available and these may be of use whilst developing your business's performance measures. Each business, however, is unique and it is important that over time you develop benchmarks specific to your business. Developing such benchmarks will also greatly assist your business planning process. 

So what are the appropriate performance measurements you should have in your business? They will of course depend on the type of business you run, but they should be simple, few in number - no more than, say 10 - and easy to calculate on a regular basis. You should examine the "rhythm" of your business: if you are a retailer there will probably be a daily rhythm; an employment agency providing temporary staff may have a weekly rhythm; and, a the rhythm of a building business may be associated with the time it takes to complete a building project from inception to hand-over. Most performance measures will be related to this "rhythm". 

For many businesses there are "classic" performance measures such as "stock-turn" for a retailer and the ratio of labour cost to contract revenue for a commercial cleaning business. Telecommunications companies, and banks measure "churn rate". You may be able to simply adopt these classic measurements or you may have to develop some that are particular to your business. When deciding on the measurements you think you will need you must consider how you are going to collect the data required, how easy it is going to be, how accurate and how often. The value of a measurement will be compromised if it costs too much to calculate, cannot be calculated accurately enough or cannot be collected within the timescale that is the rhythm of your business.

Regular review of performance measures will give you comfort that your business is on course or, if things are not going as planned, give you early warning so that action can be taken before it is too late.

If you would like to take to us about we can help you set up performance measures for your busines contact us for a chat. It won't cost you anything but it might help.