The First Step of Growing Your Business:Performance Measurement and Target-setting
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Performance measurement and target-setting
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.
The importance of measurement and target-setting
Performance measurement and target-setting are important to the growth process. While many small businesses can run themselves quite comfortably without much formal measurement or target-setting, for growing businesses the control these processes offer can be indispensable.
The benefits of performance measurement
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).
Bear in mind that quantifiable isn't the same as financial. While financial measures of performance are among the most widely used by businesses, non-financial measures can be just as important.
The benefits of target-setting
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.
Choosing and using key performance indicators
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
First, they should be as closely linked as possible to the top-level goals for your business.
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 England 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.
Getting the most from your KPIs
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.
Managing your information
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.
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