Use Performance Metrics to Drive Change

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A Performance Measure is a metric of an important activity, which is quantifiable, measurable, and meaningful. You use it as a yardstick that objectively measures achievement toward a specific business objective.

Performance metrics can cover a wide range. For example:

  • Financial Metrics
  • Operational Metrics
    • Inventory turn rate
    • Scrap percentage
  • Customer Focused Metrics
    • Average number of daily customers
    • Number of website hits
  • Process Related Metrics
    • Number of backorders
    • On-time delivery percentage

The purposes of using performance metrics are basically to help decision-makers know what is going on in their specialty quickly and accurately and to help accounting do more situational analysis with trending and less variance reporting. I am a big believer in trend analysis for your business.

A good performance metric is more than just something that you can easily track or one your accounting system automatically provides. Metrics that measure what is important need to meet the following criteria:

  • Focuses attention on a critical activity
  • Is measurable
  • Is monitored regularly
  • Provides frequent and timely feedback or insight
  • Includes a mix of financial and operational measurements
  • Is simple to understand, yet has the pulse on what is occurring on an hourly or daily basis

Sadly, people have a short attention span. In addition, brain researchers tell us that we can only hold three or four data points in our brain before we run out of bandwidth. In a nutshell, the goal of using performance measures for providing timely and quality feedback to others is to give report users simple data points that are meaningful and that they can remember. When they remember them and the metrics are meaningful, this greatly increases the likelihood that managers will pay attention to that metric.

Performance measures should:

  • Support the strategy by highlighting goals
  • Express measures for critical drivers
  • Express performance targets
  • Reduce confusion day-to-day

Performance metrics are both simple and complex. The simplicity is that the metric measures one activity or event. The complexity occurs when you put two or more simple metrics together and they create an index or benchmark. The components of performance metrics include:

  • The input(s)
  • The output(s)
  • A method of measuring
  • A degree of measurement – quality or quantity based
  • An assessment of the measure – as expected or unexpected

Proverbs 27:23 (NKJV) states “Be diligent to know the state of your flocks, and attend to your herds.” Properly designed and timely communicated metrics are essential for business prosperity and are a great way to reinforce behavioral change to make it permanent. If you would like more information about developing and using performance metrics to boost your prosperity or if you would like to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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