Measuring business performance

How do you measure the success of your business?

When I speak to small businesses most respond that they look at financial statistics; whether it is the monthly sales figures or the end of year profit.  For many, it is simply that they are making enough income to make ends meet.

However, there are problems with relying solely on accountancy or financial figures to judge the health of your business and they affect big businesses as well as SME’s.

There is an old cliché.  It states that German firms are run by engineers, American firms by business graduates and British firms by accountants.  When you consider that research carried out in 2012 showed that 49% of FTSE100 Chief Executives had a finance background and that this had risen from 38% in 2002; perhaps there is some truth in the meme.

Accountants tend to look at three things:

  1. Where the money comes from
  2. Where the money goes
  3. Whether the result of 1 and 2 is good or bad.

Accountancy information is historical.  It look to the past, not the future.  It only provides a loose link to business and marketing strategy.  Accounts will tell you if you are making money or not.  They will not tell you if the financial performance came as a result of a particular strategy or promotion.

Worst of all, focusing solely on financial data can lead to some terrible decision-making.

Take the case of General Motors in the early 1980s.  At that time, GM was making losses.  The company’s board asked the finance director to identify which production plants were profit-making and which made losses.  GM at the time controlled the full production process and even carried out activities like making its own steel.  The finance team identified a number of loss-making factories and these were closed.  GM’s board believed they were acting prudently by closing the loss-making plants and concentrating on those that made profits.

However, the results of GM’s plant closure plan was not a return to profitability.  Instead the losses continued and some plants, which were profitable suddenly began to make losses.  The company entered a downward spiral of plant closures and continuing losses.

The reason for this spiral was that GM’s board did not consider what effects the plant closures were having on their economies of scale and that some of the loss-making plants carried out specialist functions which added value further down the production process.

Marketers look beyond financial data to judge the success of their actions.  They will consider financial information such as the return on the investment in a campaign but they will also consider statistics such as share of voice (how much coverage a campaign gets compared to competitors either in terms of amount of press copy or the number of hours of advertising time) or consumers ability to recognise a brand name.

So is there a method of balancing the historical data contained in financial accounts with the more esoteric statistics favoured by marketers?

In the mid-1990s, Kaplan and Norton began the process of developing a balanced business scorecard which aimed to provide a rounded picture of a business’s performance which could also be used for strategy development.

The balanced scorecard looks at four perspectives:

  1. Financial,
  2. Customer,
  3. Internal; and,
  4. Innovation, Learning and Growth.

Within each perspective, measures are directly linked to the business mission statement and SMART objectives.  For example, financial measures would include profitability and earnings growth; customer measures would include brand recognition and the level of customer complaints; Internal measures would include the improvement in the rate of production and the level of scrap produced; innovation, learning and growth would include the amount of CPD undertaken by staff, the number of successful new product launches or the number of technological improvements in production processes.

The balanced scorecard also recognises that a virtuous cycle can exist.  if you improve innovation, learning and growth, that can provide better internal processes.  Better internal processes can lead to improved customer relations.  Improved customer relations can lead to better financial results.  Better performance in all these areas can lead to strategic success and the fulfilment of your business mission.

Accountancy and financial measures have their place in the measurement of business success but often it is non-financial analytics which can provide the rounded picture of a business which leads to the successful achievement of strategy.