If you're serious about succeeding in business, chances are you're already doing something different or better than the business next door.
That's what having a competitive edge is all about - offering something different to encourage customers to come to you rather than your competitors.
But it's not enough just to have the edge; you've got to keep improving it. And to know how and where to make improvements, you have to be able to measure your business performance.
Traditional data not enough
Traditional accounting-based performance information is extremely important to understanding the financial health of your business, but these days it's not enough. It ignores the key issue of linking operational performance to the business's strategic objectives. As well, it's often inadequate for the strategic decision making needed to expand a business.
Surviving in business today is more about measuring the value you add. It's about measuring how well you are performing against your business goals and objectives and, significantly, where you can improve.
With that in mind, what you should now be looking to measure in your organisation is:
- How well you are doing operationally such as in customer servicing, delivery and accuracy
- How well your customers think you're doing such as in satisfaction levels and retention rates
- How well your employees think you're doing such as in satisfaction levels, productivity and retention rates, and of course,
- How well you are doing financially such as in return (profitability) on net assets.
While keeping financial soundness as a principal factor, businesses today need to venture beyond costs and profits and look to a variety of measures in order to maintain their competitive edge and succeed.
Key Performance Indicators
The trend these days is for small and medium-sized businesses to measure performance using Key Performance Indicators (KPIs). A KPI is a way of measuring a particular business process, a bit like evaluating how well the company is doing in that particular area. By recording and analysing KPIs company-wide the business owner can see at a glance which processes need attention.
KPIs provide the detail measures of your business that financial measures can never reach. And what good is an A+ profit and loss sheet when you're actually losing customers hand over fist through slack customer servicing. If, however, you were using KPIs to measure:
- What customer deadlines have been missed?
- What is the conversion rate from quotations to sales?
- For which department were customer complaints received?
- What is the direct cost of complaints?
Then you would already have seen why you were losing customers, how much it was costing you and exactly where you would need to start making some improvements.
If you rely solely on traditional financial data you cannot get an accurate picture of what is really happening in your business.
A set of inter-connected business processes
In order to develop relevant, meaningful KPIs that will accurately measure your business, you need to catalogue what your company does as a set of inter-connected business processes. Once you've catalogued each process you need to develop a KPI for each one which can measure how well your business is doing in that particular area. Once in place make sure the information is collected regularly and provide feedback to all levels of the organisation.
Results from this type of measuring system are more meaningful to the day-to-day work of employees than financial data, especially when they are taking part in collecting the information. A set of financials doesn't have any relevance to their jobs but individual processes do Ã¢â‚¬" dealing with customer complaints immediately or servicing orders more quickly is something employees at the coalface can definitely aim for. These small improvements are more likely to make the biggest impact on your business.
This theory of performance measurement, often known as the 'Balanced Scorecard Approach', requires management to focus on factors that create long-term economic value and strategic benefits to the organisation. It focuses the organisation on carefully chosen, actionable measures Ã¢â‚¬" things that business line managers and their teams can influence directly.
For assistance setting up a performance measurement system for your business contact Paul Martin Chartered Accountant Ltd on (09) 576 4166.