Business performance metrics

Business performance metrics show actual results achieved, compared with target levels of firm performance.

Performance metrics can help improve accountability. Firms should select valid and cost effective ways of measuring achievement. This enables alignment of operations with strategic intent.

Such performance metrics tell people if the firm is achieving its purpose, treading water, or in decline.

Measuring Corporate Performance

Business performance metrics measure the success or failure of the organization to achieve its corporate purpose.

Corporate purpose is to provide a benefit for the intended beneficiaries. In the case of a business, the performance metrics must measure achievement of the purpose of creating wealth for owners or shareholders.

Such business metrics sit above all other performance indicators. I call these ‘beneficiary’s performance indicators’, or BPI. A BPI aids corporate target setting. BPIs enable comparison with similar businesses.

Assessing comparative performance

Some organizations offer data on the performance of firms in various areas. These may give an idea of ‘best practice’ performance. This may guide in target setting. It may give insight into the value of various business performance indicators...

The PIMS (Profit Impact of Market Strategy) of the Strategic Planning Institute
This project studies the relationship between business actions and results.

The database holds profiles of over 3,000 business strategies. Data covers the market environment, the state of competition, the strategy pursued by each business, and the results achieved. For more information click here.
PIMS provides insight for  strategic thinking. PIMS theory guides the thinking of senior executives in major companies around the world.
PIMS is now a database of business strategies, used to guide the use of business performance metrics, generate benchmarks, and help in strategic decision-making.

IBIS World

Another kind of resource is Global Industry Research Reports

IBISWorld Global Industry Reports analyze industry performance.

Reports cover market characteristics, operating conditions, current and historical performance, major industry participants and so on.

In business performance metrics no one size fits all

Each type of business may require slightly different performance measures.

In most cases, these will relate to return on capital and or growth of profits or earnings. You only need one or two of these  metrics for strategic planning designed to lift the long run performance of the firm as a whole.

Do you need special systems, with their balanced scorecards, and executive dashboards?

Often managers face an array of business metrics with masses of detailed results. What they need is a few important performance measures that show how well the firm delivers value to the Intended Beneficiaries.

These three business performance indicators probably suit most enterprises -

Return on Equity (RoE)

RoE measures net profit after tax and interest and after dividends paid to any preferred stock, divided by common shareholders’ equity.

RoE includes factors that are all within the control of the CEO.

It is clear, and, it is usually possible to find out the RoE of your competitors.

Return on Capital Employed (ROCE)

RoCE is earnings before interest and tax (EBIT), divided by total assets, less creditors and provisions. The denominator in this equation is equal to shareholders' funds plus interest-bearing liabilities - that is, all the funds on which a company needs to earn a return.

However, ROCE is not the best measure to use at the top corporate level because, it leaves out the cost of interest and tax, both of which top management can – and should – influence. However, ROCE is a useful measure to use at a division or profit centre level. For a multi-profit centre firm, then, the divisional RoCE targets need to be consistent with the group RoE target. Set the group target and then work out the divisional ROCE targets, which correspond to that group RoE target.

Earnings per Share (EpS) and Growth of EpS

EpS is calculated by dividing profit after tax and interest by the number of shares on issue. It is thus the earnings returned on each share held by the shareholders.

Shareholders most often hope for growth in dividends and share price. This business performance metric is easy to find for your competing enterprises over a few years, thus informing your own target setting.

Return from Business Performance Metrics to Gap Analysis.

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