Performance measurement is a key aspect of a growing business. It helps them progress better by objectively identifying the flaws that may exist in their current ways of working. A good measurement system helps to manage the performance proactively by examining triggers for any change in performance. Periodic measurement and monitoring of financial performance can help such businesses improve and reinvent their current processes accordingly to best suit their growth. Monitoring figures closely also help to maximise efficiency and minimise waste, which helps in the long run.
One of the key challenges with financial performance management is selecting what to measure. The priority here is to focus on those factors that are quantifiable and are directly linked to the drivers of success in business. Focusing on key business drivers and finding the specific measures that enable business improvement is key to financial performance measurement.
Businesses running profitably without having a disciplined financial performance measurement process may be fooled into thinking that they have their pulse on all their business drivers. As the business grows in size and business drivers change or evolve over time, people dependency and gut feel based decision making will be a sure recipe for accelerated business decline. A financial performance measurement system works as a guide to future growth. It establishes a method for sustainability of business growth and helps in taking guided decisions.
When there are a number of parameters to measure, choosing the right ones is most important. Some guidelines to be noted while choosing key performance indicators to measure financial performance are:
- How closely are they linked to top-level goals for the business?
- Are they easily quantifiable?
- How well do they relate to aspects of the business environment over which one has control?
The ability to have the right finances in place and plan financial matters effectively can help a business grow and adapt to a changing economic environment. Understanding the basic concepts of cash flow will help plan for any unforeseen eventualities that may occur. Some key indicators of financial performance management are cash-flow analysis, monthly profit or loss, product/project line wise profitability, overhead costs, return on investment, return on assets, interest coverage ratio, debt-equity ratio, current ratio, stock turnover days, debtor turnover days and breakeven sales. The nature and context of business will help you identify the right mix.
In the timely measurement and use of these metrics, depends your business survival and success.