Performance is the quality of execution of an action, operation, or process. It is the competence or effectiveness of a person or thing in acting. Performance measurement is especially the capabilities, product, or person performance measurement against a standard for assessment and analysis. Business performance measurement here is all about the overall performance measurement of an organization as to how it faired in the defined period as may be required.
Businesses set standards and expectations in line with their strategic business objectives and goals concerning time, for example, a business prepares its annual budget in terms of cost and expected profit for the period or can prepare a sales target for its sales department and other forms of a target for its general operation regarding it key performance indicators (KPI), setting the required standard or threshold with which at that level of achievement, the business is expected to be making a profit or be at a favorable position.
Business performance measurement can be in two categories with different KPIs:
- Financial performance measurement
- Non-Financial measurement
Financial performance measurement and analysis measures in terms of financial indicators how well the business has performed in the course of a particular period in focus and most time their measurement are done using ratio analysis and these are in six broad categories:
- The Profitability ratio: This measure how profitable a business has been in the course of the period under review, it measures the profitability of a company in terms of its revenue in a period. It is profit as a percentage of revenue, capital, and other resources.
- Liquidity ratio: This measure the liquidity position of a business to meet its immediate needs. It measures a company’s ability to meet its short-term obligations in the shortest possible time excluding inventory. Here the current asset less inventory is a fraction/percentage of current liability.
- Efficiency Ratio: This is used to measure the efficiency of business utilization of its resource put into the business and it comes in the form of turnover of its resources.
- Investor Ratio: This measure the business effectiveness and efficiency of a business process in terms of yield and profitability. This is an important ratio to the capital market operator which include potential and existing investor/shareholder and other stakeholders too are interested in these ratios for business decision and investment purpose.
- Solvency ratio: it measures long-term liquidity in terms of its financial structure and how it can meet its long-term debt. Debt to equity ratio is used to measure the percentage of debt – total long-term debt to shareholder fund and also represent the financial structure of a company. It also shows how total long-term debt can be paid off using the shareholder fund.
- Coverage ratio: This is the ratio that concerns long-term interest debt. It is used to know how convenient it will be for the business to pay its debt investor, it calculated how many times a company can cover its interest expense with its revenue generated.
The Non-financial performance indicators are also vital to the performance of a business as those non-financial indicators are usually enablers to the financial indicator. Customer satisfaction, number of returning customers, referrals, and customer ratings are all forms of non-financial performance measurement indices. The use of Financial and non-financial performance measures ensures business profitability and must be properly measured and monitored regularly to put the business in the best position to meet its corporate strategic objectives.