How to Measure Your Small Business's Performance
Do you measure the success of your business solely in terms of profit and loss? This is crucial information, of course, but to get a truly accurate measurement of the state of your company's financial health, consider broadening the scope of your analysis.
Here are four tips for assessing how well your business is performing.
1. Identify your goals. What do you aim to accomplish? Significant goals may include increasing market share, improving customer retention rates, and generating a higher volume of online traffic. In any case, until you know what you want, you can’t measure what you have.
Write down your goals in as much detail as possible. What percentage of market share do you want to achieve? By what percentage do you want to improve sales conversion rates? Goals should present challenges to your business, but none that you can’t reasonably hope to accomplish.
2. Develop key performance indicators. Most businesses rely on financial statements and sales results as their primary indicators of performance, but you can develop many other "KPIs" that fit your particular enterprise.
Where are your company's strengths and weaknesses? By focusing on specific indicators, you can measure performance against the goals you've identified. KPIs track performance, thus leading the way toward improving performance where it's needed most. In this way, you create a history of how well your business performs over weeks, months, and years. From this history, you'll be able to quantify success and make note of warning signs where changes are necessary.
3. Determine appropriate metrics. Examples of relevant indicators may include:
- Sales growth
- Market share
- Distribution processes
- Sales-force training and effectiveness
- Product quality
- Customer retention rate
- Age of equipment
- Workforce turnover
- Readiness to expand capacity
- Levels of quality control
- Retention of suppliers
Another key metric is comparing your company's performance against that of the competition. Fortunately, plenty of information on your competitors is available, including what you can find by conducting a simple web search, browsing their annual reports, and monitoring their press releases and any coverage by news media or trade publications.
Gathering this information is part of the data collection process. Each business has to find its own best way to track, compile, and record the most relevant data, based on what emerges from the KPIs.
4. Measure what's most important. It may take a little time and effort, but after getting a sense of what information is crucial to track, you want to actually narrow your ongoing performance measurement. (This isn't feasible until you truly grasp the parameters of your company's strengths and weaknesses.) Choose one or two major objectives, refine your KPIs around them, and focus on collecting the relevant data.
This approach separates successful business owners from those who chalk up their success or failure to poorly defined "market conditions" or "adverse sales environments." With some focused monitoring and analysis, you'll have a much better understanding of where your efforts are most effective and where you need to adjust your processes to avoid a major setback.
Lee Polevoi is an award-winning business writer specializing in the challenges and opportunities facing small business. He is former Senior Writer at Vistage International, a global membership organization of CEOs.