Measuring the performance of your business will tell you how things are going, and will also tell you where any problems lie and even what to do about them.
In the past many companies have focused on financial measures such as turnover and profit as key indicators of the performance of the business, but increasingly companies are looking for a wider set of measures, including things such as customer satisfaction and employee motivation to offer information on growth potential and performance.
Financial measures are critical for understanding the health of any business, and they deserve your attention. Key financial measures include:
- variable costs
- fixed costs
- gross and net profit.
- earnings (profit on ordinary activities after taxation)
- working capital (money tied up in the business trading cycle comprising stock, debtors and cash less any amounts due to creditors)
Additionally, a number of financial ratios can be calculated, that allow observers such as investors or the bank to compare your business to its peers.
Performance ratios indicate the profitability of your business, allowing you to look beyond turnover and examine the cost of winning new business and making sales. They include:
- Return on equity: This ratio measures how much profit your business generates relative to the amount of capital you and others have put into it. It is calculated as profit after tax, divided by ordinary share capital and reserves.
- Profit margin: This ratio measures how much of each sale goes as profit, and is calculated as profit before interest and tax divided by sales.
Financial status ratios
These measures provide you with information on liquidity of your business. They include:
- Gearing: This ratio measures how indebted your company is, and is calculated as total debt (long and short term) divided by capital employed
- Interest cover: This ratio is used by lenders to evaluate how easily you can make your interest payments on loans, and is calculated as Profit before interest and tax divided by your interest expense
- Current ratio: This ratio measures liquidity, and is calculated as current assets divided by current liabilities
Identifying Performance Measures for your Business
- Write down you business objectives. These should be clearly outlined in your business plan
- Next identify a number of key steps that you need to take to achieve these objectives. Do you need to attract more customers? Or reduce your purchasing costs? Do you need to increase cross sales?
- Now you can identify two types of performance measures for your business: results that will let you know how close you are to delivering your objectives and drivers that will tell you if your current activities will be enough for you to meet your objectives