Do I Need to Measure Business Performance as a Small Business?
Before I outline the 5 easy steps in developing key performance indicators, ask yourself the following questions:
- Is my small business in good shape?
- What are the trends in my small business?
- Is my small business performance improving or declining?
- Which area of my small business needs improvement?
- Where do I need to focus my effort and allocate or re-allocate resources?
- How does my small business stack up against the industry or competition?
If you as entrepreneur and small business owner do not measure business performance, it is unlikely that you will know. Measuring business performance could well make the difference between small business success or small business failure.
Also read our blog on the 10 Good Reasons for Small Business Performance Measurement.
Small Business Performance Measurement Starts at Startup
Business performance ratios analysis starts before your small business is in business. You will gain valuable insights into planning and documenting your business venture by doing it on the frontend. Developing key performance indicators (KPIs) and measuring business performance in your small business should not be complicated. Your small business key performance indicators (KPIs)will depend on your strategic goals, business complexity and the nature of the operations.
Start by measuring only those things that are important/critical for your small business success. You can always refine business performance ratios and get more sophisticated, if justified, over time. Prepare a simple spreadsheet with the quantified output/input measures and calculations for your business performance measures. Make projections and set goals for future performance levels.
The 5 Easy Steps in Developing Key Performance Indicators for Small Businesses
The 5 steps in developing key performance indicators are as follows:
- Define Key Result Areas (KRA): Based on the analysis of the functions that your small business needs to perform (or is performing), define the Key Result Areas. Keep in mind that someone (or yourself) needs to be responsible or accountable to meet the agreed business performance levels of every Key Result Area. It could be as simple as Sales Performance, Operational Performance, Logistic Performance, Financial Performance, Customer Service Performance, Organization Climate, etc.
- Identify the Type of Business Performance Measure: Once you have defined your Key Result Areas, decide what type of small business performance you want to measure. Is it quantity, quality, timeliness, utilization, efficiency or what?
- Define Your Outputs: Subsequently, you need to decide on the output units of measure associated with the type of business performance measure. In defining units of measure, it could be useful to consider each of the 5 Ms; that is Manpower, Materials, Machines, Methods and Money. Examples of unit measures are: customers, sales, items, inventory costs, working hours, inches, households, documents, incidents, visits, cases, damaged products, etc.
- Define Your Inputs: For each of the output units of measure for a specific type of business performance measure; what do you need to achieve that output. That is what are your input units of measure. These are similar measures as listed above. Measures could be an input or output, depending what you are measuring.
- Define Your Small Business Key Performance Indicators (KPIs): Your business performance ratios measure the relationship between your outputs and inputs. The small business key performance indicators are therefore, simply the outputs divided by the inputs. Examples are Customer Complaints per month and Gross Profit Margin (Gross Profit divided by Sales).