Business Performance Measurements: How To Increase Production, Profit And Morale - Part 1

Business Performance Measurements

Business Performance Measurement is a gauge or measure of one aspect of business performance. You use them now. You probably don't call them that. You refer to weekly sales, gross income, gross profit, net profit and such. Those and expenses are valid financial performance measures that relate to the performance of the business as a whole.


What about measurements that gauge the performance of a business unit or an individual that is not a trading entity? Such cannot be measured in standard profit and loss terms.

Number of widgets manufactured is a production measure. Number of widgets shipped and percentage of shipments correctly received on time and undamaged are distribution measurements of quantity and quality. Number of sales calls made, number and value of sales are measures of sales staff activity and results.

Key Performance Indicators

Key Performance Indicator or KPI, to which it is commonly abbreviated, is a synonym for business performance measurement. It is perhaps a more appropriate term to be using when referring to the production of individuals and sub-sections of a business.

Statistics

In this article, whenever I use the term statistic I am referring to its use as a Key Performance Indicator or Business Performance Measurement.

Rationale

Any progress, by definition, needs to be measurable. If you can't measure your progress, how do you know if you are making any?

The way you can tell if you are making progress towards your business objectives is with objective measurements. Any objective measurement that gives you insight into how your business is performing over time is a valid target to staticise. If you are not regularly measuring your progress then you are not being well enough informed.

When you were at school you sat exams at the end of the year to see if you had retained the data the teachers gave you during the year. But some people failed! Similarly many businesses do a tax return once a year to see if they made any money. Sadly, 90% of business fail. Are we detecting a trend here?

Once a year is far too seldom to measure your progress, in school or in business. Once a month is still too seldom. By observation, testing progress once a year does not provide early enough detection of a departure from the ideal to permit remedial action to accomplish the objective! That last sentence is such an important point and it is so different from so much of your experience that I'd like you to go back and reread it.

Gold nugget: Checking needs to be done at a frequency appropriate to the rate and relative importance of the changes.

Example: Driving the car at 120 kph requires more frequent verification that you are still on course and nothing new has entered the equation than driving at 5 kph. At 5 kph you could take your eyes off the road, talk to your passenger for 5 seconds and chances are nothing would have changed by the time you again looked at the road. After all, you've travelled merely 7 metres. Now something may have changed, which is why you don't take your eyes off the road, even at 5 kph. At 120 kph the distance travelled in the five seconds (166 metres), the extra time and distance it takes to stop in an emergency and the potentially fatal consequences of an error, all dictate that you pay more attention to more frequent checking that the driving conditions have not changed.

You should be measuring your organisational and divisional KPIs once a week and your personal ones daily! If you are doing substantial internet marketing of your business, you should be checking some marketing metrics even hourly! After all, the sooner you notice something is different, the easier it is to spot the reason for the difference. Also, the faster you take appropriate action, the better the outcome.

Important Data

One very important thing to bear in mind is that a key performance indicator is most valid when used as a comparison, sometimes against its own past (500 last week and 550 this week) and other times against another, (bills = $45,000 when cash in bank = $100,000 is good whereas bills = $45,000 when cash in bank = $10,000 is bad).

Often the date completely changes the perception of the indicator. For instance if I proudly said to you I made $20 for the week you would think the pride misplaced. If I gave you further data that the year I earned it was 1969 and I was 17 years of age at the time, it would alter your perspective completely.

In the next article in the series I will relate some of my experiences with KPIs.

By: Tom Grimshaw

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Tom Grimshaw is the CEO of Just For You SoftwareHe can be contacted at www.just4usoftware.com.au See how your business stacks up, take the tests at www.testyourbiz.com Copyright© 2008 by Tom Grimshaw. ALL RIGHTS RESERVED. Permission is hereby granted to reprint and distribute this article in whatever legal and ethical format and fashion you care to use providing it is used in its entirety, including the copyright notice.

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