How To Effectively Measure Business Performance in 7 Steps
Updated June 24, 2022
Effectively measuring business performance can help organizations improve their processes, evaluate the success of their strategies and alert them to potential risks. There are many methods businesses can use to evaluate their performance. Gaining an understanding of the best strategies and tools for developing insights and producing actionable performance summaries can help businesses remain viable and adaptive. In this article, we define what business performance is, explain why measuring it is important and offer a list of steps you can use to start reliably measuring the success of your company.
What is business performance?
Business performance is a term that describes how well an organization is doing. Optimal performance might look different for individual companies depending on their industry, goals and size. Businesses can measure their performance using metrics that evaluate the various aspects of their processes. For example, companies might measure key performance indicators (KPIs) like customer retention rates, operating margins, failure rates, costs per lead, conversion rates or acquisition costs. Establishing reliable metrics helps companies quantify their success, make important business decisions and develop applicable strategies.
Why is it important to measure business performance?
It's important to measure business performance because doing so can offer businesses valuable insight they can use to:
With reliable metrics, businesses can better assess the effectiveness of their strategies and focus on practices that produce desirable outcomes. If your analysis reveals there are areas of your operations that aren't operating at the standard you'd like them to be, you can work toward identifying the source of the inefficiency and implementing actionable solutions. With quantifiable measurements, businesses can objectively rate performance to determine the success of their various business areas and decide where best to direct their efforts.
Another useful benefit to measuring performance is the ability it gives companies to track their progress. After implementing a new strategy, investing in new software or equipment or adjusting training practices, analysis can reveal the effects of those decisions on a business's operations. By recording key information like sales numbers, turnaround times or customer satisfaction rates over multiple quarters or years, businesses can compare current performance to past metrics. This can provide valuable insight into how they're growing as a company.
Measuring business performance can be a great way for companies to share their success with others. They might prepare reports for management teams to assess the success of individual teams, or generate summaries so investors can see the reliability and strength of the company. Establishing reliable metrics and generating insightful reports can help key stakeholders assess the health and vitality of the organization.
Make informed business decisions
When making a business decision, supporting the choice of data can help validate the soundness of the decision. With reliable metrics, businesses can make informed selections reinforced with facts. For example, when deciding how to allocate funds for their upcoming marketing campaign, a company may use historical data to notice how social media marketing produces a higher return on investment than other marketing strategies. They can decide to spend a higher percentage of their marketing budget on social media marketing and reinforce their decision with fact-based evidence.
How to measure business performance
If you're interested in measuring the performance of your business, here are some steps you can take:
1. Identify goals
The first step to measuring business performance is to outline your company's goals. By establishing what success looks like for your company, you can develop useful measurement strategies aimed at evaluating and promoting your version of success. Your goal might be to grow your customer base or decrease the time you spend on qualifying leads. List both short- and long-term goals relevant to the health and vitality of your specific company. Many businesses use critical success factors, or CSFs, to represent their priorities.
Here are some examples of CSFs businesses may choose to focus on:
Reduced production costs
2. Develop reliable metrics
With your goals in mind, try to establish the metrics you'd like to track. These metrics, called key performance indicators, or KPIs, can provide valuable insight into the effectiveness of your current processes and the success of your business strategies. Unlike CSFs, which describe what success looks like for a company, KPIs offer valuable quantifiable data companies can use to track their progress toward their goals. Like CSFs, the KPIs you choose to measure can be specific to your company.
Here are some examples of common KPIs businesses choose to measure:
Number of customers
Number of return customers
Average sale value
Debt to equity ratio
Revenue per customer
Customer satisfaction rates
3. Collect the data
By Identifying the KPIs you're interested in learning more about, determine the tools you need to collect the data. There are free online analytics tools and for-purchase software options that can help you collect and organize your data. If you're collecting data from social media marketing efforts, many sites allow you to choose the metrics you want to track, like impressions, engagements and clicks. Surveys, accounting program reports and transaction records can also be valuable data sources to draw from.
4. Establish reporting processes
Once you determine which KPIs can best help you evaluate your business's success and start collecting data, you can use it to inform important conclusions about your business performance. Data alone won't provide insights, so work to provide reporting processes that turn your data into actionable intelligence. Comparing performance over time can be a valuable tool for measuring the success of your business strategies.
Decide which data points connect and create multiple, unique reports designed to offer valuable conclusions. While using metrics to monitor performance can take a large upfront time investment, the sooner you collect data and start establishing relationships, the sooner you can use the data to make key observations about your business performance.
5. Make predictions
Measuring current and past business performance is helpful, but the real value of data is in its ability to inform future decisions that have high probabilities of success. Data can offer two key functions, providing business intelligence (BI) and business analytics (BA). BI allows you to monitor current performance and can give you useful insights into how your company has grown and what factors are influencing its performance. You can use BI to evaluate the strength of your management teams, improve employee satisfaction and gain insight into key customer information like changes in satisfaction, retention and engagement.
BA goes further. It uses your data to inform future business success and processes. It takes your data tools and allows you to not just measure current performance, but to predict the best way to encourage future profits, growth and success. BA software can be expensive, so aligning your KPIs and your data collection methods can help you make the most of the powerful tool.
6. Use benchmarking
Benchmarking is a way businesses can evaluate their success and performance against others in the market. Because businesses don't operate in a silo, reliably measuring business performance often requires knowledge of competitors' activities along with their own. Establishing benchmarks for others' success and performance can give you valuable comparison points and help you gauge your success against your competition. When establishing benchmarks, stay conscious of other businesses' size and unique offerings. Try to choose compatible companies whose processes and activities are like your own.
7. Improve your analysis
How you measure your business's performance can change as your company grows. Constantly look for ways to remain innovative in your processes and get the most value from your measurements and data. For example, only measuring profits won't necessarily give you practical insight into your performance as a company. Gaining a comprehensive perspective on everything informing your performance, like employee satisfaction and retention, competitor actions and changing markets, can help ensure you remain a viable leader in your industry.
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