How to Properly Measure Business Performance
Importance of Measuring Business Performance
Companies that measure business performance gather, analyze, and report data with the objective of understanding their business more comprehensively. Business performance measurement is a crucial component of business management as well as business success overall.
There are many factors to consider when analyzing business performance including-
- Key performance indicators
- Net profit margin
- Sales growth
- Acquisition of new customers
- Social media marketing
- Customer satisfaction rates
- Customer service reviews
Often times, business owners fall prey to a variety of different misconceptions about measuring business performance. Common misconceptions include-
1. Overconfidence- Many business owners believe their decision making skills and business strategy are optimal in comparison to their competition. However, overconfidence can prevent business performance from improving.
One example is a fast food industry study where decreased customer satisfaction levels were assumed to be a result of high employee turnover levels. As customer satisfaction is important to the cash flow of a business, the fast food business owners decided to actively reduce employee turnover.
To their surprise, even with decreased employee turnover, customer satisfaction levels were not increased. Through statistical analysis, the business owners found that the store manager turnover rate was actually the major determinant for customer satisfaction rates.
Although their original assumption was incorrect, these fast food business owners learned that measuring performance and business management is more complicated than they originally thought. Learning from their mistakes and property measuring performance allowed them to optimize their customer satisfaction rates and focus on the performance indicators that matter most.
2. Fear of change- People have a tendency to stick with what they know and avoid risks, even when the potential for profit is substantial. Although change may feel uncomfortable, business owners must realistically weigh potential risks and gains instead of avoiding change altogether.
For example, a newly started subscription business may have acquiring new customers as their top business strategy. However, over time that same company should shift its business strategy towards sales growth for existing customers and customer retention.
Business success is dependent on a flexible business strategy that uses key performance indicators and long term performance measures for decision making.
Methods for Measuring Business Performance
There are numerous individual performance measures that a business can use but a combination of various methods will provide a more comprehensive conclusion. Common methods for measuring business performance include-
1. Financial performance measurement- A high performance business must be generating profit to be considered sustainable and successful. There are three main financial performance statements frequently used- the balance sheet, cash flow statement, and income statement.
The balance sheet clearly shows what is owed and owned in order to measure business financial fitness. The income statement displays both profit and loss your business incurs over a specified time period.
The cash flow statement indicates how much available liquid cash your business possess. Business owners can measure financial performance with any combination of these three statement types.
2. Customer satisfaction measurement- There are numerous ways to measure customer satisfaction levels, ranging from social media surveys to employees asking new customers directly in store about their experience.
New customers who are not satisfied with their experience are much less likely to return to your business. Considering that the cost of acquiring new customers is so much more than retaining existing customers, customer service is crucial to long term business success.
3. Market measurement- Whether you own a small business or a large corporation, a best practice to adopt is staying current with news regarding the market. Market changes may indicate a future trend or explain an existing issue in your business's sales.
Make sure to check in with your competitors to see how other businesses similar to yours are performing. Knowing what your competition is doing is a great way to stay ahead of them.
4. Performance review measurement- Employees are a company's greatest investment and most valuable asset. Therefore, it is no surprise that so much of company performance is dependent on employee performance.
Make sure to administer performance reviews at least once a year, but administering reviews more frequently can be beneficial. Beyond analyzing key performance indicators business professionals should look for great customer service reviews and milestones that an individual employee has accomplished.
Performance reviews may also indicate a need for scheduling changes or business process improvements that business owners may not have otherwise discovered. For example, an employee may be consistently late because of a childcare conflict which could be easily remedied through part or full time remote work.
5. Social media measurement- Even if you own a small business it is important to use social media effectively and measure its performance. Social media is increasingly relevant in the business world, with more companies using platforms to develop their brand.
Social media offers free or low cost marketing for your business. Best practice social media marketing techniques include posting positive customer service reviews on your business's social media page.
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