Measure performance and set targets

Measuring your business performance and setting targets are important processes for helping your business to grow.

Many small businesses can run themselves quite comfortably without much formal measurement or target-setting. However, growing businesses need to control these processes, especially if they want to:

• expand the business by taking on more staff
• create new departments within the business
• appoint new managers or directors

Benefits of strategic business reviews

Strategic business reviews are useful if:

• you are uncertain about how well your business is performing
• you want to know how to get the most out of your business or market opportunities
• your business plan is out of date - eg you haven't updated it since you started trading
• your business is moving in a direction different to the one you had planned
• the business is becoming difficult or unresponsive to market demands

If you feel that your business needs to change in order to thrive or respond to market demands, consider implementing a formal change management process.

Setting targets for performance measures

Knowing how your business performs across the different areas can help you assess its strengths and weaknesses and find things you can change for the better. This should help you manage your performance proactively and efficiently.

However, in order to get the right information, make sure that you measure the correct areas of your business. These are known as key performance indicators (KPIs).

You should measure non-financial targets as well as financial ones. Consider:

• your customers - eg how many you have, how often they use you and how many customers you have lost or gained
• customer service - eg waiting times for assistance, complaints, or reasons customers have complained
• market share - eg if your share of the market is increasing or decreasing against competitors
• your staff - eg satisfaction levels, work quality or attendance records

See more on deciding which key performance indicators to measure.

Benefits of setting targets

When you identify your KPIs and find the best way to measure them, use them to set your performance targets. These will give everyone in your business a clear idea of what they need to aim for, individually and collectively.

Break your main strategic goals down into smaller targets to make them easier to manage. By doing this, your smaller targets become more like day-to-day operations which, once completed, move you closer to your final goal.

Setting the business strategy

To set a clear business strategy, consider looking at:

• Your business direction - where you are now, where you want to go over the next three to five years and how you intend to get there.
• Your markets - now and in the future. Look at what markets you should compete in, how you can achieve this, and how these markets will change in the future.
• Market advantage - ask yourself how you can gain an advantage over your competitors and outperform them in your chosen market.
• Resources you need to succeed - the skills, assets, finance, relationships, technical competence and facilities you need to compete. Determine if these are likely to change in the future.
• Business environment - including internal or external factors that may affect your business' ability to compete.
• Measures for success - performance measures may change as your business matures.

You may not be able to answer these questions on your own. Consider asking input from professional advisers, fellow directors or senior staff to make your business review more effective. 

Find out more about strategic planning for business growth.

To measure your business performance successfully, you should identify and focus on the right areas of your business. These vary from sector to sector and business to business.

You can identify specific areas in your business by looking at your key drivers of success. These may be, for example, profitable customers, a high volume of sales or productivity efficiencies.

Assess your core business activities

A good starting point for reviewing your business performance is to evaluate what you actually do. Look at your core business activities and the products that you make or services that you provide.

Think about what makes them successful, how you could improve them and if you could launch new or complementary products or services.

For example, consider:

• How effectively are you matching your goods and services to your customers' needs? The key is to understand your customers' needs.
• Which of your products and services are successful? Are some not performing as planned? Do any of your products generate a high percentage of sales and high-profit margins? Use this information to make product improvements or discontinue low performing products or services if you can.
• What causes problems for your business? Review areas such as pricing, marketing, sales and after-sales service, design, packaging and systems. Look for 'quick wins' initially, and scrutinise areas that require comprehensive improvements.
• Do you need more regular financial management reviews? Are you managing your direct costs, overheads and assets? Can you do things differently or use new materials to lower your costs? Consider ways in which you can negotiate the right deal with suppliers.

Once you identify your challenging or most profitable areas, you should find the correct measurements to assess them.

Finding your specific performance measures

To find the right measures for your key performance indicators (KPIs), focus on the areas and elements of your business performance that make you successful or profitable.

For example, a manufacturer that produces and sells low-cost goods in high volumes might measure the production line speed. Another manufacturer that produces smaller quantities but uses high-cost components might focus on reducing production line errors instead. A service provider may consider customer service a priority and develop measures around that specific area.

There are many ways of setting measures for your business. You might consider measuring:

• the proportion of sales from returning customers
• the number of customer complaints received
• the number of returned items
• the time it takes to fulfil an order
• the percentage of incoming calls answered within 30 seconds

None of these is necessarily better than the other. The challenge is to find which specific measure - or measures - will enable you to improve your business.

Almost any business can use certain standardised performance measures, such as balanced scorecards and industry dashboards. Some businesses also use colour-coded systems of measurement, such as traffic lights - red signifying a problem, green that all is fine - as alternative approaches.

See how to use KPIs to assess business performance.

Key performance indicators, also known as KPIs, help you measure and evaluate the effectiveness of solutions, functions and processes in your business.

KPIs take into account your business' strategic goals and measure performance against a specific target, defined from a strategic, planning or budget point of view. Measuring KPIs can help you determine if you're likely to achieve your business' objectives.

Every business is unique. Selecting the right KPIs and using them effectively will help improve your business performance.

Types of KPIs

Many types of KPIs exist that you can use in your business. You should use the ones that make the most sense for your business and strategy. Most KPIs will focus on one of these objectives:

• improving revenue
• reducing costs
• increasing efficiency
• improving customer satisfaction

Some examples of KPIs include:

• average time to complete a task
• percentage of tasks completed on time
• percentage of overdue tasks
• cost of service delivery
• cost of managing processes
• downtime and availability
• number of complaints received
• volume of tasks per staff
• customer ratings of service
• number of process errors
• return on Investment
• debt-equity ratio
• operating margin
• revenue per employee
• employee satisfaction index
• order fulfilment cycle time
• production yield
• customer satisfaction index
• customer acquisition cost

Your KPIs should relate to aspects of the business environment over which you have some control. For example, interest rates may be a crucial factor of performance for a given business, but you can't use the Bank of England base rate as a KPI because businesses have no power to change it. By contrast, you can control your business' exposure to fluctuations in interest rates and so this might make a useful KPI.

Why are key performance indicators important?

The purpose of performance measurement is ultimately to drive improvements in performance. KPIs can help you achieve this by allowing you to:

• spot potential problems or opportunities
• set targets for business and staff that will deliver your strategic goals

Find out how to set business performance targets.

Download a key performance indicator assessment template (DOC, 18K).

How to measure KPIs?

After you define a KPI, you will have to determine the best method of measuring and assessing performance against it. It can help to break down the assessment into more manageable components and measure each separately. You must monitor KPIs regularly for them to be effective.

For KPIs to work well as a management tool and keep you on track to achieving your goals, you have to be able to accurately measure and report on the measures. Computer-based management information systems are available for this purpose. See more on computer software for business.

Measurement of financial performance is an important part of running a growing business. Many businesses fail because of poor financial management or planning.

Financial performance review

Financial performance review can help you examine your business goals and plan effectively for improving the business. When carrying out a financial review of your business, you should consider:

• Cashflow - this is the balance of all of the money flowing in and out of your business. You should regularly review and update your forecast. See cashflow management.
• Working capital - have your requirements changed? If so, try to determine why and assess how this compares to the industry standard.
• Cost base - keep your costs under review. Make sure that your costs are covered in your sale price - but don't expect your customers to pay for any business inefficiencies. See how to price your product or service.
• Borrowing - what is the position of any overdrafts or loans? Can you use cheaper or more appropriate forms of finance? See borrowing finance for your business.
• Growth - do you have plans in place to adapt your financing to accommodate your business' changing needs and growth? Find out more about financing growth.

Financial performance measures

One of the most important financial areas you should review is your profitability. This is your capacity to make a profit, ie generate revenue that exceeds your overall expenditure (all costs, taxes and expenses). Most growing businesses ultimately target increased profits, so it's important to know how to analyse your profitability ratios.

Profitability ratios typically fall under two broad categories: margins and returns. Most common profitability ratios are:

• Gross profit margin - how much money is made after direct costs of sales have been taken into account, or the contribution as it is also known.
• Operating expenses margin - this lies between the gross and net 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. All overheads, as well as interest and tax payments, are included in the profit calculation.
• Return on capital employed - 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 with other investments you could make with it, like putting it in the bank.

Accounting ratios to measure performance

As well as measuring profit, you should consider other standard financial ratios to help you to analyse your business' performance. These ratios look at:

• liquidity - assessing your ability to meet your short-term financial obligations
• solvency - measuring long-term debt against assets and equity to determine financial stability
• efficiency - measuring things like stock turnover to determine how well you are using your business assets

Measuring these ratios against industry averages, previous years and competitors can help you to identify problems and issues within your business. See how to use accounting ratios to assess business performance.

Customer-focused performance is a business approach to measuring performance in terms of customer retention, customer satisfaction, service response time, etc. Under this approach, all processes in your business are tailored to meet customer requirements and satisfy their expectations.

Customer-focused KPIs

To measure performance of a customer-focused business, your key performance indicators (KPIs) should also be customer-centric. Some common metrics to track are:

• customer satisfaction score - eg through numbers, stars, smiley faces, etc
• net promoter score - measures how likely your customers are to recommend you
• first response time - the speed of response is a great market for customer satisfaction
• customer retention rate - your ability to keep a customer over time
• quality of service - including reliability, assurance and responsiveness
• employee engagement - staff motivation can affect quality customer service

See how to use KPIs to assess business performance.

When reviewing your business' performance, as well as customer satisfaction, you'll need to assess your customer base and market positioning as a key part of the process.

A strategic business review can help you re-evaluate market factors such as:

• changes in your market
• new and emerging services
• changes in your customers' needs
• external factors such as the economy, imports and new technology
• changes in competitive activity

Importance of customer feedback

Customer feedback is essential - the more you know about what your customers think and want, the easier it will be to handle increased numbers of customers. 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

See how to gather customer feedback.

Download a customer service evaluation example (PDF, 20K).

Asking for customer feedback helps to identify where you can make improvements to your products or services, your staffing levels or your business procedures. See how to manage your customer service and understand your customers' needs.

Business performance reviews of this kind can be very effective - they can give your business the flexibility it needs to beat off stiff competition at short notice. However, think through the implications before you make any changes. You'll need to plan your finances and resourcing carefully at all times.

Manage customer information and relationships

Customer relationship management (CRM) software 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 customer service levels by ensuring that all customer-facing staff have ready access to each customer's history.

Grow your customer base

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. See how to retain and grow your customer base and increase your market share.

As your business grows, the number of people you employ is likely to increase. To keep on top of how your employees are doing, you may need to find ways of efficiently measuring staff performance.

Some common ways include:

• one-to-one meetings
• staff meeting
• appraisals
• end-of-year or 360 reviews

Meetings and appraisals

Informal meetings and 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. You can use them to increase productivity and performance by setting employee targets and measuring progress towards achieving them.

See more on managing the performance of your staff.

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.

KPI metrics for employee performance

Looking at employee performance from a financial perspective can be a valuable management tool. The most commonly used measures in this area are:

• sales per employee
• contribution per employee
• profit per employee

These measures are not an alternative to the broader appraisals but can flag up issues that you might later want to explore in more detail during the formal performance management process.

Expressing employee performance in quantitative measures 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 salesperson has generated or how many units manufacturing employees produce per hour at work.

But with a bit more effort, you can apply these kinds of measures 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.

Download a sample performance review form (DOC, 23K).

Performance benchmarking involves systematically measuring and comparing your performance to that of other businesses, often in the same industry or sector.

What is benchmarking in performance management?

It is a valuable way of identifying best practices that other businesses, including your competitors, utilise to enhance their performance. By benchmarking against them, you can find areas for improvement or adapt specific best practices to increase one or more aspects of your own business performance.

By carrying out performance benchmarking, you should aim to answer the following questions:

• Who is the best performer in your sector/industry?
• What makes them the best?
• What lessons can you learn from them?
• What actions can you do to improve performance?

You can carry out a benchmarking exercise as a one-off event or as a continuous process.

Types of benchmarks in performance management

A benchmark describes the 'best in class' performance that a specific business process or activity has achieved. Benchmarks can be:

• internal - comparing internal operations within the same company (eg evaluating absenteeism rates across the business, or one site or team against another)
• external - against a specific competitor for a specific product, service or activity
• generic -comparing same/similar functions or processes, regardless of industry/sector

When choosing the specific benchmarks for your business, you should focus on those areas that drive business success in your sector - your key drivers. These will typically be similar to your key performance indicators.

Find businesses to benchmark against

It is usually helpful to compare yourself against businesses in the same sector. However, 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.

See also competitor analysis.

Find external benchmarking data

The most common challenge with benchmarking is finding external data for your comparisons.

There are a number of sources for this kind of information. You can:

• research competitors and markets with Invest Northern Ireland
• contact your trade association - they often collate sector-wide statistics
• use commercial market reports - they offer great detail, but can be costly

Using your benchmarking data

You should use benchmarking data in the same way you use any other performance measurement data you generate - to drive improvements in the way your business operates.

Typically this will involve setting business targets to help you reach the benchmark values to which you aspire. See how to set business performance targets.

Measuring business performance will not drive your business forward by itself. For long-term success and improved performance, you will have to align your metrics and key performance indicators (KPIs) with clear targets and goals.

Importance of setting targets in business

Each KPI you measure must have a target or goal associated with it. Without meaningful performance targets, you may be in the dark about how your business is doing. For example, you may not know:

• if you're on track to achieving your strategic goals
• if your productivity is improving or decreasing
• if your customer satisfaction is dropping
• if your profits are falling or growing

See more on deciding which key performance indicators to measure.

Setting SMART targets

Your business targets should be SMART - specific, measurable, achievable, realistic and time-bound:

• Using KPIs ensures your targets will meet the first two criteria - all KPIs should, by definition, be specific and measurable.
• Achievable - you need to set ambitious targets that will motivate and inspire your employees. Look back at your recent performance to get 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.

See how to use KPIs to assess business performance.

Assigning responsibility and resources for targets

After you set your business targets, you should assign clear responsibility for delivering each of them.

Your top-level strategic objectives may be abstract and business-wide. However, 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.

Read more about employee focused performance measurement.

Reviews and continuous improvement

It is important to regularly review how the targets are working and allow for any adjustments. It is likely that you will need regular reviews, updates and revisions to your business plan and targets in order to maintain performance and business success.

A planning cycle can enhance your ability to make changes in your business routine if necessary. Good planning helps you anticipate problems and adapt to change more easily. See how to prepare a business plan for growth.

If you need expert support with assessing your business performance or setting targets, you can appoint a non-executive director or seek help from skilled management consultants.

Competitor analysis or competitive intelligence is a strategic assessment of the strengths and weaknesses of rival businesses. It is a key tactic for finding out what your competitors are doing and the level of risk they pose to your business.

Such analysis involves collecting publicly available information through things like market research, financial filings, online databases, press coverage, market reports or benchmarking data.

Importance of competitor analysis

Competitive analysis can help you:

• understand the marketplace conditions in your industry
• refine your business strategic direction
• spot gaps in the market
• spot opportunities for differentiating your products and services
• analyse competitor's product development initiatives

The type of competitor information that you may find useful depends on the type of your business and the market you're operating in. Ideally, your analysis will answer questions on:

• who your competitors are
• what they offer
• how they price their products
• how the profile and numbers of their customers compare to yours
• what their competitive advantages and disadvantages are compared with yours
• how they may react to your market entry, product or price changes, etc

You will probably find it useful to benchmark your business performance and carry out a strengths, weaknesses, opportunities and threats (SWOT) analysis. This will show you how you are doing in relation to the market in general and specifically your closest competitors.

See SWOT analysis example.

How to gather competitive intelligence

There are three main ways to find out more about your competitors:

• What they say about themselves - sales literature, advertisements, press releases, shared suppliers, exhibitions, websites, competitor visits, company accounts.
• What other people say about them - your salespeople, customers, local directories, the internet, newspapers, analysts' reports, market research companies.
• Publicly available business information - eg trade or sector bodies, or enterprise agencies may have some information available.
• Commissioned market research - you can contract a commercial company or commission specific market research via an organisation such as the Market Research Society.

Business in Northern Ireland may get help from Invest NI with researching competitors and markets.

Business analysis models are useful tools and techniques that can help you understand your organisational environment and think more strategically about your business. Dozens of generic techniques are available, but some come to the forefront more frequently than others do. These include:

• SWOT (strengths, weaknesses, opportunities, threats) analysis
• PESTLE (political, economic, social, technological, legal and environmental) analysis
• scenario planning
• Porter's Five Forces framework

SWOT analysis

SWOT analysis is one of the most popular strategic analysis models. It involves looking at the strengths and weaknesses of your business' capabilities, and any opportunities and threats to your business.

Once you identify these, you can assess how to:

• capitalise on your strengths
• minimise the effects of your weaknesses
• make the most of any opportunities
• reduce the impact of any threats

See our SWOT analysis example.

A SWOT analysis gives you a better insight into your internal and external business environment. However, it does not always prioritise the results, which can lead to an improper strategic action.

One way to make better use of the SWOT framework is to consider the customer's perspective when making strategic plans and decisions. You can do this by applying importance-performance analysis (IPA) to identify SWOT based on customer satisfaction surveys.

Other strategic analysis tools

In addition to SWOT, other useful techniques include:

• PESTLE analysis - a technique for understanding the various external influences on a business. See our PESTLE analysis example.
• Scenario planning - a technique that builds various plausible views of possible futures for a business.
• Critical success factor analysis - a technique to identify the areas in which a business must succeed in order to achieve its objectives.
• The Five Forces - a framework for looking at the strength of five important factors that affect competition - potential entrants, existing competitors, buyers, suppliers and alternative products/services. Using this model, you can build a strategy to keep ahead of these influences.

Read more about strategic planning for business growth.