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A growing business needs to be closely and carefully managed to ensure the success of new investment decisions and expansion
plans. However, many owner-managers find that as their business grows they feel more remote from its operations.
Putting performance measurement systems in place can be an important way of keeping track on the progress of your business. It
gives you vital information about what's happening now and it also provides the starting point for a system of target-setting that will
help you implement your strategies for growth.
This guide sets out the business benefits of performance measurement and target-setting. It shows you how to choose which key
performance indicators (KPIs) to measure and suggests examples in a number of key business areas. It also highlights the main
points to bear in mind when setting targets for your business.
Knowing how the different areas of your business are performing is valuable information in its own right, but a good measurement
system will also let you examine the triggers for any changes in performance. This puts you in a better position to manage your
performance proactively.
One of the key challenges with performance management is selecting what to measure. The priority here is to focus on quantifiable
factors that are clearly linked to the drivers of success in your business and your sector. These are known as key performance
indicators (KPIs). See the page in this guide on deciding what to measure.
Bear in mind that quantifiable isn't the same as financial. While financial measures of performance are among the most widely used
by businesses, nonfinancial measures can be just as important.
For example, if your business succeeds or fails on the quality of its customer service, then that's what you need to measure -
through, for example, the number of complaints received. For more information about financial measurement, see the page in this
guide on measurement of your financial performance.
If you've identified the key areas that drive your business performance and found a way to measure them, then a natural next step is
to start setting performance targets to give everyone in your business a clear sense of what they should be aiming for.
Strategic visions can be difficult to communicate, but by breaking your top level objectives down into smaller concrete targets you'll
make it easier to manage the process of delivering them. In this way, targets form a crucial link between strategy and day-to-day
operations.
Deciding what to measure
Getting your performance measurement right involves identifying the areas of your business it makes most sense to focus on and
then deciding how best to measure your performance in those areas.
Your performance measurement will be a more powerful management tool if you focus on those areas that determine your overall
business success.
This will vary from sector to sector and from business to business. So put some time into developing a strategic awareness of what
it is that drives success for businesses like yours.
It's crucial that you tailor your measurement to your specific circumstances and objectives. A manufacturer producing and selling
low-cost goods in high volume might focus on production line speed, while another producing smaller quantities using high-cost
components might focus instead on reducing production line errors that result in defective units.
Once you have identified your key business drivers, you need to find the best way of measuring them. Again, your priority here
should be to look for as close a link as possible with those elements of your performance that determine your success.
For example, you may decide that customer service is a strategic priority for your business and to therefore start measuring this. But
there are many ways of doing so.
None of these is necessarily better than any other. The challenge is to find which specific measure (or measures) will enable you to
improve your business.
This type of measurement unit is often referred to as a key performance indicator (KPI). The two key attributes of a KPI are
quantifiability (i.e. you must be able to reduce it to a number) and that it directly captures a key business driver. See the page in this
guide on choosing and using key performance indicators.
There are standardised performance measures that have been created which almost any business can use. Examples include
balanced scorecards, ISO standards and industry dashboards.
Key performance indicators (KPIs) are at the heart of any system of performance measurement and target-setting. When properly
used, they are one of the most powerful management tools available to growing businesses.
Selecting KPIs
There are a number of key criteria that your KPIs should meet:
First, they should be as closely linked as possible to the top-level goals for your business. See the page in this guide on deciding
what to measure.
Second, your KPIs need to be quantifiable. If you can't easily reduce your measurement to a number, there will be too much scope
for variation and inconsistency if different people carry out the measurements at different times.
Third, your KPIs should relate to aspects of the business environment over which you have some control. For example, interest
rates may be a crucial determinant of performance for a given business, but you can't use the Bank of Canada base rate as a KPI
because it's not something that businesses have any power to change. By contrast, a business' exposure to fluctuations in interest
rates can be controlled and so this might make a useful KPI.
The purpose of performance measurement is ultimately to drive future improvements in performance. There are two main ways you
can use KPIs to achieve this kind of management power.
The first is to use your KPIs to spot potential problems or opportunities. Remember, your KPIs tell you what's going on in the areas
that determine your business performance. If the trends are moving in the wrong direction, you know you have problems to solve.
Similarly, if the trends move consistently in your favour, you may have greater scope for growth than you had previously forecast.
The second is to use your KPIs to set targets for departments and employees throughout your business that will deliver your
strategic goals. For more information about using target-setting to implement your strategic plans, see the page in this guide on how
to set useful targets for your business.
As with most areas of your business operations, the more detailed and well structured the information you keep about your KPIs is,
the easier it will be to use as a management tool. Computer-based management information systems are available for this purpose.
It will be much easier to invest and manage for growth if you understand how to drill into your management accounts to find out
what's working for your business and to identify possible opportunities for future expansion.
Most growing businesses ultimately target increased profits, so it's important to know how to measure profitability. The key standard
measures are:
Gross profit margin - this measures how much money is made after direct costs of sales have been taken into account, or the
contribution as it is also known.
Operating margin - the operating margin lies between the gross and net (see below) measures of profitability. Overheads are taken
into account, but interest and tax payments are not. For this reason, it is also known as the EBIT (earnings before interest and
taxes) margin.
Net profit margin - this is a much narrower measure of profits, as it takes all costs into account, not just direct ones. So all
overheads, as well as interest and tax payments, are included in the profit calculation.
Return on capital employed (ROCE) - this calculates net profit as a percentage of the total capital employed in a business. This
allows you to see how well the money invested in your business is performing compared to other investments you could make with
it, like putting it in the bank.
There are a number of other commonly used accounting ratios that provide useful measures of business performance. These
include:
liquidity ratios, which tell you about your ability to meet your short-term financial obligations
efficiency ratios, which tell you how well you are using your business assets
financial leverage or gearing ratios, which tell you how sustainable your exposure to long-term debt is
Cash flow
Bear in mind that even though you are likely to use an increasing number of financial measures as your business grows, one of the
most familiar – cash flow - remains of fundamental importance.
Cash flow can be a particular concern for growing businesses, as the process of expansion can burn up financial resources more
quickly than profits are able to replace them.
Looking at things from your customers' perspective can help you avoid getting sidetracked as you consider your options for growth.
Feedback is key - the more you know about what your customers think and want, the easier it will be to cater for growing numbers of
them. Look for as many ways of capturing this information as possible, including:
sales data - what your customers choose to buy (or not to buy) provides the clearest indication of their preferences
complaints - but remember that many customers will simply switch suppliers before making a complaint
questionnaires and comment cards - a very useful source of information, so consider using incentives to encourage more customers
to complete them
mystery shopping - having someone pose as a customer for research purposes can give a very clear sense of how well you are
performing
Software for customer relationship management (CRM) can be a powerful tool for capturing and analysing information about your
customers and the products and services they purchase.
CRM also enables you to push up service levels by ensuring that all customer-facing staff have ready access to each customer's
history.
Selling more to existing customers might be the easiest way of increasing sales, but most businesses aiming for significant growth
will need to find ways of reaching new groups of customers.
So knowing more about sections of the market you haven't yet tapped is crucial.
Informal meetings and more formal appraisals provide a very practical and direct way of monitoring and encouraging the progress of
individual employees. They allow frank exchanges of views by both sides and they can also be used to drive up productivity and
performance through setting employee targets and measuring progress towards achieving them.
Regular staff meetings can also be a very useful way of keeping tabs on wider developments across your business. These meetings
often give an early indicator of important concerns or developments that might otherwise take some time to come to the attention of
your management team.
Expressing employee performance quantitatively is easier for some sectors and for some types of worker. For example, it should be
quite easy to see what kind of sales an individual sales person has generated, or how many units manufacturing employees
produce per hour at work.
But with a bit more effort, these kinds of measures can be applied in almost any business or sector. For example, using timesheets
to assess how many hours an employee devotes each month to different projects or customers under their responsibility gives you a
way of assessing what the most profitable use of their time is.
It is usually helpful to compare yourself against businesses in the same sector. But your market position and your objectives, among
other things, will affect the specific comparisons you want to make.
For example, a small business in a crowded sector may want to benchmark itself against average performance levels in the sector.
But a business targeting rapid and significant growth may choose comparisons with an established market leader.
You can also benchmark internally within your business. For example, comparing absenteeism rates between departments may
enable you to spread good working practices from the best-performing areas of your business.
What to benchmark
In general, the same rule applies to benchmarking as to choosing which performance measures to use. You should focus on those
areas that drive business success in your sector - your key drivers. See the page in this guide on deciding what to measure.
How to benchmark
You should have ready access to all the figures for your own business, so the main challenge with benchmarking is often the
process of finding external data for your comparisons.
Your trade association is a useful starting point, as these organisations often collate sector-wide statistics.
Commercial market reports may provide greater detail, although these can be costly.
Benchmarking data should be used in the same way as any other performance measurement data you generate - as a spur to
improve the way your business operates.
Typically this will involve setting targets to help you reach the benchmark values you aspire to. For more information on target-
setting, see the page in this guide on how to set useful targets for your business.
Not right first time (NRFT) - this is a measure of the rate of defective units being produced. The higher it goes, the greater the
waste of resources and the greater the risk that customers will be inconvenienced.
Stock turns (ST) - this gauges the number of times a business sells and replaces its inventory. Higher stock turn rates indicate that
a business is operating efficiently and not tying up resources in slow-moving inventory.
Overall equipment effectiveness (OEE) - this is a way of measuring whether you're making the most of a piece of machinery. It
combines three elements - the amount of time the machine can be used, the rate at which it is operated and the proportion of its
output that is defective.
People productivity (PP) - this measures the number of worker hours taken to produce each unit of output. However, PP also
distinguishes between valuable and wasteful production - this to ensure that productivity figures aren't skewed by the overproduction
of units for which there's no customer demand.
Floor space utilisation (FSU) - this measures the level of revenue generated per square metre of factory floor space. It reflects
how efficient a business is at minimising its fixed costs.
Delivery schedule achievement (DSA) - this measures your success at delivering the goods your customers have ordered to the
schedule you have promised them.
Value added per person (VAPP) - this measures the amount of value the manufacturing process adds to raw materials and
compares it to the number of people involved in the process. Like PP above, it is a measure of employee productivity.
For more information about these business drivers, see the page in this guide on deciding what to measure.
Performance targets are a powerful management tool that can help you deliver the kind of strategic changes that many growing
businesses need to make. The top-level objectives of your strategic plan can be implemented through departmental goals, and
setting targets based on KPIs is an ideal way of doing this.
For example, a company seeking to expand on the basis of its product design capabilities might target year-on-year increases in the
number of patents it secures, of new products it launches, or of its licensing income. The specifics will depend on which KPIs best
capture the dynamics in the market.
It's a familiar acronym, but a very useful one - your targets should be SMART - specific, measurable, achievable, realistic and time-
bound:
Using KPIs ensures your targets will meet the first two criteria, as all KPIs should, by definition, be specific and measurable. For
more information about KPIs, see the page in this guide on choosing and using key performance indicators.
Achievable - you need to set ambitious targets that will motivate and inspire your employees, but if you set the bar too high you risk
deflating and discouraging them instead. Look back at your performance data for recent years to get a sense of what kind of
performance boosts you've seen before - this will give you a sense of what is feasible.
Realistic - setting realistic targets means being fair on the people who will have to reach them. Make sure you only ask for
performance improvements in areas that your staff can actually influence.
Time-bound - people's progress towards a goal will be more rapid if they have a clear sense of the deadlines against which their
progress will be assessed.
Once you have identified the targets based on your KPIs that you believe will deliver the strategic growth you're aiming for, make
sure you follow through by assigning clear responsibility for delivering each of them.
It is fine for your top-level strategic objectives to be abstract and business-wide, but your KPI targets should be concrete and clearly
owned by a department or individual.
Hitting your targets is unlikely to be a cost-free process, so be ready to make the necessary resources available when needed. Also,
undertake regular reviews to assist with motivation and to make changes if the progress made isn't as expected.
Original document, Measure performance and set targets, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs
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