In order to develop an already financially stable business further, it is crucial to measure business performance and set future targets.
Regular business performance reviews are crucial if you are looking to find new markets, access new customers and other new business opportunities. Such regular reviews will help to find new revenue channels, help avoid any unforeseen cash flow problems and add many more advantages of reviewing business progress.
So, in order to help you manage your business efficiently, here is an in-depth guide on how to measure business performance:
Measure your financial performance
In order for your business to achieve success a sound review of your financial performance is key.
A review of your financial performance can help you reassess your business goals and plan effectively for improving the business. When conducting a financial review of your business, you might want to consider the following:
Cash flow – Cash flow is crucial for your business success. In order to keep track of and measure business performance, you should ensure that your cash flow forecasts are kept up to date and reviewed regularly.
Working capital – as well as keeping an eye on your cash flow forecasts you should make sure your working capital is on point. Most of the time the two will be closely linked by your finance team, but if you are measuring business performance from an operational perspective this might be left out. Always ensure that you have enough working capital, and wherever necessary, take steps to source additional capital when your requirements change.
Costs – keep your business costs under constant scrutiny. Best performance management will consider costs and review them under the magnifying glass.
Borrowing – measuring business performance should include all of your finances, overdrafts, and loans included. Additionally, just as the working capital and costs, both should be found on your financial forecasts. If you are looking for a good tool to help you keep track of all of these costs in your forecast, try ProForecast.
Planned Growth – is your business looking at any major growth plans, or are they already at the implementation stage? For your business performance measurement make sure that you have good oversight of this so that it doesn’t send your business cost spiralling out of control.
Measuring your profitability
Additionally, for measuring business performance it is important to keep track of your overall profitability. Most businesses target increased profits and growth, so it is important to know what is happening with your profits. The standard measures to keep an eye out for include:
Gross Profit Margin – in order to ensure your finances are performing well, you have to have transparency to your gross profit margins, that is profits after direct costs of sales have been taken into account.
Operating margin – it is also known as EBIT or earnings before tax and interest. This helps you to measure the margin between gross and net measures of profitability.
Net profit margin – this is a much different measure of profits that takes all costs into account. It takes overheads, interest and tax payments and combines it into the profit calculation.
Return on capital employed – this will give you a good understanding of what is actually happening in your business, as it calculates net profit as a percentage of the total capital employed in a business.
Measuring your customer base
Main component to successful business performance is customers. So, when trying to measure business performance it is crucial to pay close attention to your customer base.
To start, review your business strategy, what are you currently doing and what are your plans in the future? It is important to have a good strategic planning process established in your business to help your business navigate the complicated market environment and to surpass your competitors. If you don’t have one in your business, we recommend implementing strategic planning processes.
Market forecasting and review
Market forecast will help you project the future customer numbers, characteristics, and trends in your target market. Such analysis will also show the projected number of potential customers and any possible revenue channels. Market forecasts are all about research, but combined with a good sales forecast it can help your business lead to a better or at least more stable future.
You can also read more about market forecasts and what you need to run one in our previous blog post.
Any other data
Nowadays, businesses collect all sorts of data to help out with day to day operations, and often they don’t say the light beyond the department that is using that data. But as we said, collaboration amongst different SBUs in the business is the future. In order to create the most accurate business performance review look at other teams data. What do people that deal with customers collect and how you can utilise that data. Review your marketing department and what information they use to ensure their ROIs are increasing and incorporate that data to your performance review.
Measuring your personnel performance
As a business grows you will gain more and more employees and they will require more and more oversight. This becomes increasingly difficult as this number grows. However, it is crucial for your business performance that your personnel performance and productivity stay on track.
There are a few ways you can measure your personnel productivity, and at the end of the day from the financial perspective, it is a very valuable business management tool. A few most common types are:
Performance meetings – formal or informal appraisal meetings, these provide a quite practical and direct way of monitoring and encouraging employees, as well as tracking their performance and taking their feedback.
Sales per employee – this is a standard quantitative measurement of employee performance and it is quite self explanatory.
Productive hours – another way of measuring employee performance is to look at their productive hours. If you are a manufacturing business, for example, you would look at how many units produce per hour of work. However, this type of measurement can also be applied to all businesses with a bit more effort.
Once you have measured business performance you will have to break those down into measurable indicators. Dividing your leading indicators per business department can make this task easier, allowing you to set targets for all of the teams separately.
However, creating effective business KPIs is an exceptional task, it requires multiple steps and involves a lot of your leadership team. Despite that, it provides an immense insight into your business, its performance and it can become a good revenue driver.
Are you looking at how to improve your financial forecasting and business planning?