7 simple performance measurement techniques that will make your business more profitable
Businesses are like people. As time goes by, they change and evolve because they are influenced by the environment in which they operate.
Is it for the better? Sometimes it is… but not in all cases.
Here at Northern Accountants, we know there are things we did in the last 12 months that we could do much better next year. There are also some aspects from when we first started trading in 2007 that were better than last year.
How do we know this?
We have implemented seven simple performance measurement techniques to create a step-by-step action plan which maps out what we MUST improve to make more money in the year ahead.
Here’s the best bit:
Because every goal is based on historical facts and key trends which relate directly to our business, we can be certain our aims are 100 per cent achievable.
And today we will share these performance measurement techniques with you to inspire you and make you WANT to take action!
Before beginning to analyse your business and its performance, you might be wondering:
What is performance measurement?
Performance measurement is the process of developing measurable indicators which can be tracked against actual results to establish whether progress has been made when trying to achieve predetermined goals. By monitoring budgets or targets against actual progress, a business can see how its staff are functioning both as individuals and as a team.
The secret to using performance measurement to improve your profitability is this:
Commit to doing it properly, ensure your staff know why you’re doing it – and make sure everyone buys into it!
To make sure this happens you need to:
1. Make a mission statement
Mission statements play a major role in performance measurement. If you haven’t got one already, create one.
Forget about strategic, operational or tactical objectives – and simply describe the overall goal of your business.
Focus on what you want to do – and make sure this mission statement is shared with every member of staff Because unless they know it and buy into it, you will never be able to influence or improve their performance.
2. Write a short-term and long-term performance plan
The best way to make performance measurement a success is to come up with short-term objectives (cost control) that will lead to long-term outcomes – such as improved customer
Although the goals of a business will vary depending on its type, it is important to take into account every measure of financial performance – such as profitability, liquidity, activity, and gearing – when setting long-term strategic objectives.
Once you have drawn up the long-term outcomes, the next step is to break these down into short-term objectives and define how performance will be monitored.
3. Develop different levels of objectives
Have you ever wondered how NASA manages to complete all the complex processes which are needed to fire a shuttle into space?
Here’s the deal:
They progress towards the end goal (soaring into space) by setting different objective levels for each employee – and everyone buys into them.
Even the maintenance technician knows the role he plays is vital. Because if the launch area is not kept free from debris and dust, the shuttle’s protective outside layer risks being pierced – and the whole mission is in danger of being aborted.
Getting your staff to buy in to performance measurement could help your business reach for the stars. The key is for everyone to understand their role and how it relates to the bigger picture – which, of course, should be mapped out in your mission statement.
4. Define who is responsible for each goal
Establishing a leadership hierarchy helps people to know their responsibilities and makes everyone accountable for their actions.
Senior management are often responsible for strategic planning, with the success of the business as a whole (over the long term) defining their credentials.
Similarly, department managers or middle management must be able to implement their ideas – so that the day-to-day performance of the business improves.
At an operational level, the tasks which are carried out must be done to the expected standards otherwise the other objectives of the business suffer as a result.
By knowing who is responsible at each stage, you can set suitable performance measures to monitor whether each objective has been achieved.
5. Make sure you know the critical factors to success
Critical success factors (CSFs) are essential areas which must be performed well if a business is to achieve its overall goals.
To be successful, it is vital that every member of staff knows exactly what their CSFs are – and the context of them to the business as a whole.
Without this knowledge, employees do not feel empowered and lack the context needed to pull together towards the business’ overall aims.
6. Take into account the impact of economic and market conditions
Although performance measurement techniques can help your business to grow and make more money, it is important not to get too downhearted if you fail to meet your objectives – either as individuals or as a team.
Remember, the best businesses are flexible and take into account peaks and troughs that are beyond their control – such as economic or market conditions. The actions of competitors (and its impact on demand) must also be taken into consideration when analysing performance.
7. Constantly evaluate and re-evaluate your goals
Implementing performance measurement techniques is a guaranteed way to refocus your energy on the areas with the most potential to make your business more money. However, the most important thing to do is evaluate and re-evaluate your goals.
By measuring the overall profitability of the business, the return on any investments made or a comparison of the actual costs and revenues with the budgeted costs and revenues for each department, you will quickly be able to judge actual profit against the budgeted target.
Discussing this with your staff on a group or individual basis, quarterly or every two months, will allow you to update them on progress, discover any obstacles (additional time or resources) and reset their goals if necessary.