How to Measure Business Performance (And Why It's Important)
Updated November 20, 2022
Understanding how well a business is performing often requires more than just basic metrics, such as sales units and revenue. Organizations, especially large ones, often measure large amounts of data to understand where they're doing well and where they can improve. Knowing which data are valuable and how to measure and compare them can help you evaluate business performance, making you a stronger candidate for business positions. In this article, we explain what business performance is, provide steps for how to measure business performance, and discuss the benefits of using these measurements.
What is business performance?
Business performance represents how successfully an organization is operating. What's optimal performance for one business can differ greatly from another. Businesses measure their performance differently depending on the industries in which they operate, their goals, and their size. Businesses measure their performance with metrics that assess the varied aspects of their processes. Organizations measure key performance indicators (KPIs) such as acquisition costs, costs per lead, customer retention rates, failure rates, and operating margins. Having accurate ways to measure their performance enables businesses to make better decisions and develop effective strategies.
How to measure business performance
Knowing how to measure business performance is important for anybody who works in business, but the process differs depending on the organization. Because businesses can measure their performance differently, there isn't one universal way of doing it, but there are basic steps that most businesses tend to follow. The following are some steps to measure business performance:
1. Identify the goals of the business
Before you can measure the performance of a business, it's important to first outline the goals of that business. By establishing the parameters of success for a company, you can then develop useful measurement strategies that evaluate its progression toward those goals. A business may have such goals as growing its customer base or decreasing the time it takes to qualify leads.
It's often beneficial for a business to have both short- and long-term goals. Ideally, these goals relate to the company's health and security. Businesses often use critical success factors (CSFs) to represent their priorities. The following are some examples of CSFs on which businesses often focus:
reduced production costs
2. Develop reliable metrics
Once you've established the goals of a business, the next step is to decide on the metrics you'd like to track. These metrics, the KPIs of a business, can produce valuable insights into the effectiveness of the current business strategies. Unlike CSFs, which express what success might look like for a company, KPIs represent quantifiable data that a company can use to track its progress toward its goals. Like CSFs, the KPIs a company chooses to measure might be specific to that company. The following are some examples of common KPIs a business might measure:
average sales value
customer satisfaction rates
number of customers
number of return customers
revenue per customer
3. Collect the data
After a business identifies its most important KPIs, it can then figure out the tools it requires to collect relevant data. You can use free online analytics tools or for-purchase software options that help you collect and organize your data. For example, if you want data about social media marketing efforts, many sites allow you to choose the metrics you want to track, such as impressions, engagements, and clicks. You might also consider using accounting program reports, transaction records, and surveys as sources of valuable data.
4. Develop reporting processes
Once a business has collected data that is relevant to its KPIs, it then examines the data to make important conclusions about its business performance. Data requires proper contextualization and understanding to provide useful insights. Thus, to make data more valuable, you can work on reporting processes that turn data into actionable intelligence. For example, comparing performance over time is a valuable tool for measuring the efficacy of business strategies.
Choose which data points correlate. Then, construct multiple, unique reports to offer valuable conclusions. The more quickly you collect data and start establishing connections using metrics to monitor performance, the sooner you can use the data to make key observations about the performance of a business.
5. Make predictions
Another important reason to measure current and past business performance is it can help you make decisions that are likely to bring business success in the future. Data provide business intelligence and analytics. Business intelligence allows you to track current performance and offers helpful insights into how a company has grown and what factors are affecting its performance. You can use business intelligence to assess the effectiveness of management teams, increase employee satisfaction, and understand key customer information, such as changes in satisfaction and retention rates and engagement.
Business analytics involves using data to inform future business success and processes. Analytics don't merely measure an organization's current performance. It also enables you to predict the best way to increase future profits, growth, and success. Business analytics software may require a significant investment, so it's important to align the KPIs and data collection methods to maximize the benefits from these tools.
6. Practise benchmarking
Benchmarking is a method that organizations can practise to evaluate their success and performance against competitors in the market. Because businesses operate in environments with direct and indirect competitors, being able to measure their business performance accurately frequently requires knowledge of competitors' activities. This allows businesses to establish a benchmark to which they can compare their own performance.
Establishing benchmarks for others' success and performance can give an organization valuable comparison points. This provides businesses with a more accurate gauge for their success because it considers the performance of the competition. When establishing benchmarks, it's valuable to consider the size and unique offerings of competing businesses. Benchmarks are most effective when you compare a business with compatible companies whose processes and activities are similar.
7. Enhance your analysis
How you measure an organization's performance can change as that organization grows. It's helpful to innovate your processes to maximize your measurements and data. For example, if you only measure profits, you may not gain practical insights. With a comprehensive perspective on everything informing an organization's performance, such as competitor performance, changing markers, and employee satisfaction and retention, you can help a business become or stay a viable leader in its industry.
The benefits of measuring business performance
There are many reasons that businesses measure their performance. Ultimately, it may allow businesses to perform better, which can occur in several ways. The following are some benefits of measuring business performance:
With accurate measurements, businesses can evaluate the effectiveness of their strategies more precisely. This allows them to focus on strategies that generate desirable outcomes. If business analytics reveal there are areas of a company's operations that aren't performing at the desired standard, then the company can work toward identifying the challenge and implementing solutions. With quantifiable measurements, organizations can rate performance objectively to determine the success of different areas and decide where to direct their efforts.
Another benefit to measuring performance is that it enables companies to track their progress. After implementing a new strategy, analysis reveals the effects of the strategy on the company's operations. By recording key information, such as customer satisfaction rates, sales numbers, and turnaround times, businesses can compare their current performance to past metrics. For example, if a new strategy increases sales numbers by 10% compared to the same quarter of the previous year, then this is strong evidence that the new strategy is working. Such insights are valuable because they allow organizations to know how they're growing.
Measuring business performance enables organizations to share their success internally more efficiently. They can develop reports for management to appraise the team's success or create summaries so investors can see the company's stability and strength. Establishing reliable metrics and developing insightful reports can help stakeholders understand the success and security of the business.
Improved decision making
Decision-makers and stakeholders can feel more confident about an organization's strategies when they involve reliable data. For example, when determining how to allot resources for an upcoming marketing campaign, a business can use historical data. Such data may indicate that social media marketing has produced a higher return on its investment than other marketing strategies have in the past. The business might then decide to spend a higher percentage of its marketing budget on social media marketing and explain that decision to key stakeholders with fact-based evidence.
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