Selecting Performance Measures

When you created your business plan, you made some conscious decisions regarding how to market your product or service. These decisions should help you select meaningful performance measures for your business. As a business owner, you need information regarding how the various areas of your business are doing. Tracking progress toward your goals and objectives means keeping abreast of how your business is doing currently. The very act of setting goals and objectives defines, in large part, the performance measures you'll adopt.

For example, assume that for valid business reasons your plan calls for a certain number of units to be sold in order to achieve a particular level of profit. If your pricing policy involves matching competitors who reduce their prices below yours, selling the projected number of units won't necessarily generate the level of income you projected. So what do you track? If your competitors don't try to undercut your prices, tracking units or revenues would provide the same information. But if the price at which you sell each unit varies, tracking revenues may be a more important indicator.

The same considerations apply to expenses. Let's assume that a manufacturing company employs several processes to turn raw materials into several types of finished goods. The cost of each process varies because some processes require more highly skilled (and paid) people. Also, some of the products require more processing than others. To get a true picture of production costs, you would be better off tracking labor costs than labor hours.

Almost every aspect of your business can probably be measured against some objective yardstick of success. The ability of a salesperson can be measured by the number of sales per month or by the cumulative amount of sales per month. If your business gets most of its profit from the more expensive products or services you provide, sales revenue (or dollar amount per sale) will be of far more interest than the raw number of sales.