Business Performance Measurement- 5 Key Criteria

Business Performance Measurement October 29, 2020

Chloe Henderson

Writer

Setting short and long-term objectives is essential for companies to improve their profitability and expansion. However, without proper monitoring practices, businesses are unable to measure their performance.

By utilizing business performance measurements, organizations can efficiently monitor internal processes to make improvements and ensure they are meeting their targets.

What is Performance Measurement?

Business performance measurements, also known as organizational performance measurements, are metrics gathered from multiple data sources that enable companies to track and evaluate their departments and operations.

These measurements are often compared with objectives to assess the organization's performance in the four primary areas-

Finance
Growth
Internal Processes
Customer

Every company should consider tracking performance measurements to monitor their progress against competitors. Managers can use this process to optimize their decision-making on a daily basis, initiate improvements, and achieve targets.

Overall, business performance management gives companies the tools to assess their strengths and weaknesses. By proactively monitoring and improving performance, employees gain a better understanding of what they can do to improve the department's overall performance in the future.

By implementing business performance measurement practices, companies can solidify the link between strategy and execution.

How is Business Performance Measured?

The process in which performance is measured does not always look the same from business to business. While management can determine how they would like to customize their measurements, the standard procedure includes four steps-

1. Set Goals
Management must first set goals for each department or the overall company to work towards. Common objectives include-

Expanding Customer Reach
Improving Customer Satisfaction
Increasing Website Traffic
Reducing Operational Costs
Lead Generation
Increasing Market Share
Increasing Profit Margins

Once the goals are set, managers need to establish critical success factors (CFSs), which are the conditions necessary to promote success.

2. Develop Key Performance Indicators

Then it is time to develop key performance indicators (KPIs). KPIs are ratios of the actual versus ideal performance that give management insight into different operations. Standard KPIs include-

Sales per Employee
Generated Revenue per Employee
Financial Statements
Profit Margins

Management can customize their ideal KPIs to enhance performance evaluation and progress towards set goals.

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3. Define Relevant Metrics

Similar to KPIs, business metrics are other quantified measurements used to assess the performance of various processes. Management must determine what metrics they need to monitor based on the set goals.
For example, if a company's goal is to increase profit margins, managers need to track sales, accounting, and financial metrics.

Defining metrics enables employees, staff, and stakeholders to easily monitor the company's performance.

4. Track and Measure Performance

Lastly, management should narrow down their metrics to the most critical measurements. Each manager should choose a few goals and focus on related KPIs to collect performance data.

5 Key Performance Indicator Criteria

KPIs are great tools to check processes and ensure they are progressing towards goals. However, management needs to verify that the metrics provide the most accurate performance data. By following the SMART criteria, managers can ensure that each KPI has-

Specificity

For a KPI to be specific, it cannot be overly general when it comes to performance measurement. Instead, each metric should focus on a particular operation so managers can pinpoint exactly which processes need improvement.

For example, measuring a business's overall financial health would require KPIs on taxes, income, sales, expenses, operational costs, profit margins, and other financial reports. This allows management to determine which system is negatively impacting their profitability.

Measurability

When setting goals, businesses need to ensure that they can collect measurable data on relevant processes, or else they are unable to track performance levels.

KPIs provide measurable, quantified metrics that companies can easily follow. However, management must ensure that there are available KPIs for their desired goals.

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Attainability

While setting `KPIs, management must ensure that they are attainable within the timeframe they are working. Setting unrealistic goals can lead to overworking employees and frustrated management.

Therefore, companies should carefully assess their previous and current performance levels to determine feasible benchmarks. Some businesses find it helpful to get interval targets to make consistent improvements, rather than striving for a significant improvement over a long period.

Relevance

As one of the most important requirements, KPIs must be relevant to the focus goals and operations. Many companies make the mistake of gathering an extensive list of metrics, making it difficult to effectively track performance.

Managers are responsible for determining which KPIs are relevant to their project and bring the most value.

For example, relevant KPIs for reporting employee performance include sales, revenue, and customer reviews for each worker. Other metrics, such as total hours worked, vacation days, and employee benefits, are not relevant.

Timeliness

Businesses need to determine when they would like to reach their goals. While every company would like to see results sooner rather than later, it is essential to carefully create a reasonable schedule that allows enough time for operations to improve.

Even when companies implement automation tools, such as software, employees and operations need time to adjust to the change before showing improvements.