Why measure business performance? And how?
If you want to improve the outcome of something you need to measure it. Apart from anything else, unless you measure business performance, you won’t be able to tell if it has improved.
In other areas of life this is taken for granted. Think of the way sportspeople obsess over the times they run, the heights they jump, and the goals they score. If I want to lose weight the first thing I do is get on the scales – I need to measure my current position and set a target, then measure my progress compared to that target.
So if everyone agrees that measuring is critical, why do so few small businesses measure business performance? And of those that do, why do they do it so poorly?
Even if you think you’re an exception to this, take a couple of minutes right now to think about and answer the questions below.
1. Do you keep your accounts up to date?
Many smaller businesses only enter data to their accounts at the end of the quarter, so any reports they run can be up to three months out of date. Only by having your accounts constantly up to date can you run reports that are current and which you can use to make decisions about the one thing you can change – the future.
2. Do you measure your results?
If you do keep your accounts up to date, do you run reports from your accounting system? For example, do you run a monthly profit and loss statement, and if so how soon after the end of the month do you run it?
"Once you understand the causes of the results in your business – both the good and the bad – you can decide what you want to do differently to change your results in the future."
3. Do you know what to measure?
Running a profit and loss statement is a good starting point, but what else do you measure? Do you also run a monthly balance sheet? Or a cashflow report? Do you run more detailed reports from your accounts, and then drill down into key data?
4. Do you measure inputs as well as outputs?
Not everything you need to measure is in your accounts. You should also be reporting on (and therefore measuring) the other drivers of your business. These will vary from business to business, but may include website hits, forward orders, the percentage of enquiries converted to sales, dollar per sale or a measure of repeat business.
Want more articles like this? Check out the measuring success section.
5. Do you compare the reports you run against a benchmark?
Interpreting any of your reports can be quite difficult without some basis for comparison, and that’s where benchmarking comes in. The three most common yardsticks are a previous period (such as this year against last), a budget (or forecast) or a comparison with what is the normal performance for other businesses like yours.
6. Do you prepare any ratios?
Not everyone knows what this means, and those that do often switch off, thinking that ratios are too boring! But creating just a handful of really simple ratios can tell you so much about what is going well in your business.
For example, rather than just reviewing gross profit as a dollar figure, track your gross profit percentage (divide your gross profit by your sales and multiply by 100). Using a ratio makes it much easier to spot trends (good or bad), or to compare (either to a budget or a benchmark).
Similarly, get into the habit of tracking some balance sheet ratios, such as debtors days (how long it takes your customers to pay you) or current ratio (a measure of your ability to pay your debts on time).
7. Do you know how to interpret the results?
All of the tools above should help to interpret the results, but you might also want to seek help with this. Whatever you do, make sure the information you’re obtaining about your business means more to you than just “numbers on a piece of paper”.
8. Do you take action on the results of any reports you do run?
And now the most important point of all. Just because you’ve prepared and interpreted some information, the future will not change unless your actions change. Once you understand the causes of the results in your business – both the good and the bad – you can decide what you want to do differently to change your results in the future.
So how did you score? If you got 8 out of 8 and you should be enjoying the business results you desire. A lower score means there’s room for improvement. Once you’ve used this checklist to identify any areas of reporting weakness in your business, implementing the solutions really isn’t that difficult.
Are there any other key factors you use to measure business performance? How do they drive your decisions?