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Measuring business performance and setting targets are essential for growth. While many small businesses operate comfortably without formal measurement or target-setting, expanding businesses must control these processes. This is especially true if they want to:

• hire more staff
• create new departments
• appoint new managers or directors

Benefits of strategic business reviews

Strategic business reviews are useful if:

• you are unsure about your business's performance
• you want to maximise business or market opportunities
• your business plan is outdated
• your business is heading in an unplanned direction
• the business is struggling to respond to market demands

Setting targets for performance measures

Understanding your business performance across different areas helps you see strengths and weaknesses, and shows you where to improve. To get the right information, measure the correct areas of your business known as key performance indicators (KPIs).

Which KPIs should you measure?

Measure both financial and non-financial indicators, such as:

• customers - number of customers, frequency of use, customer acquisition, and retention rates
• customer service - assistance waiting times, complaints, and reasons for customer dissatisfaction
• market share - relative to competitors, and whether it is increasing or decreasing
• staff - employee satisfaction levels, work quality, and attendance records

See how to choose the right key performance indicators.

Benefits of setting targets

After identifying your KPIs and ways to measure them, use this information to set performance targets. Clear targets give everyone in your business specific goals.

Break down your main strategic goals into smaller, manageable targets. This makes it easier to integrate them into day-to-day operations, moving your business towards your ultimate goals.

Setting the business strategy

To set a clear business strategy, consider looking at:

• Business direction - where you are now, where you aim to be in the next three to five years and how you plan to get there.
• Current and future markets - identify the markets you should compete in, strategies to enter these markets, and how they are likely to change in the future.
• Market advantage - determine how you can gain a competitive advantage and outperform your competitors.
• Necessary resources – evaluate the skills, assets, finance, relationships, technical competence, and facilities you need. Consider potential changes in these resources.
• Business environment - include internal or external factors that could impact your ability to compete.
• Measures for success – recognise that performance measures may change as your business grows.

You may not be able to answer these questions on your own. For a more effective business review, seek input from professional advisers, fellow directors, or senior staff. Collaboration can provide valuable insights and enhance your business strategy.

Key performance indicators - or KPIs - provide important insights into your business operations. They help you focus on areas that drive success and profitability. There are many possible KPIs to track, so choosing the metrics that matter most to your business is important.

How to choose key performance indicators for optimal business performance

When considering KPIs and business metrics, a good place to start is looking at key success drivers in your business. This could be, for example, profitable customers, a high volume of sales or productivity efficiencies. You can find your success drivers by assessing your core activities, products and customer needs, and looking at issues and potential improvements across your business.

Evaluate core activities

To assess your core activities, look at what you do, the products you make, or the services you provide. Think about what makes them successful, how you could improve them and if you could launch new or complementary products or services.

Assess customer needs

Determine how well your goods and services meet customers' needs. Identify which products and services are successful and contribute significantly to sales and profit margins. Use this information to improve or discontinue low-performing offerings.

Identify problems in your business

Review areas such as pricing, marketing, sales, after-sales service, design, packaging, and systems. Focus on quick wins initially, then address areas requiring comprehensive improvements.

Look at your financial management

Do you need more frequent financial reviews? Do you manage direct costs, overheads, and assets effectively? Explore ways to reduce costs, such as using new materials or negotiating better supplier contracts.

To find the right measures for your KPIs, focus on the areas of your business performance that contribute most to your success or profitability.

KPI assessment

You can download our KPI assessment template (DOC, 18K) to help you evaluate your KPIs. The document allows you to list information on your proposed KPIs, how they affect the business, and how you can ensure you meet the targets.

By presenting the information in a KPI assessment template, you or your staff should be able to easily manage your KPIs and concentrate on achieving the most important or profitable ones.

Tracking performance measures

There are many ways to track KPIs and other business metrics, including using certain standardised performance frameworks such as:

• balanced scorecards - providing a view of an organisation's overall performance
• industry dashboards - visually displaying key metrics and performance indicators
• traffic light systems - colour-coding problem areas against normal operations

Choosing the right KPIs tailored to your business needs will help you improve performance effectively. See how to use KPIs to assess business performance.

Key performance indicators (KPIs) help measure and evaluate the effectiveness of solutions, functions and processes in your business. They align with your strategic goals and measure performance against specific targets, helping you to determine if you're likely to achieve your business objectives.

Types of KPIs

Many types of KPIs exist, focusing on objectives like:

• improving revenue
• reducing costs
• increasing efficiency
• improving customer satisfaction

Fundamental KPIs for most businesses typically fall under several key areas:

• sales - eg sales revenue, growth rate, customer loss, inventory turnover
• marketing - eg customer acquisition costs or retention rates
• finance - eg net income, profit margins, working capital
• human resources - eg employee turnover and training spend

Many other business metrics could be vital to improving company performance. You should choose the ones that make the most sense for your business and strategy.

Examples of KPIs

Common business metrics include:

• average time to complete a task
• percentage of tasks overdue/completed on time
• cost of service delivery
• downtime and availability
• customer complaints received
• volume of tasks per staff
• customer ratings of service
• number of process errors
• return on investment
• debt-equity ratio
• operating margin
• revenue per employee
• employee satisfaction index
• order fulfilment cycle time
• production yield
• customer satisfaction index
• customer acquisition cost

None of these KPIs is necessarily better than the other. The challenge is finding the specific measures that will help you improve your business performance.

For example, a manufacturer producing low-cost goods in high volumes might measure production line speed, while another focusing on high-cost components might prioritise reducing production errors instead. A service provider may develop measures around customer service.

You can download our KPI assessment template (DOC, 18K) to help you evaluate the effectiveness of your KPIs.

Your KPIs should relate to aspects of the business environment over which you have control. For example, setting the Bank of England base rate as a KPI would be pointless because you have no power to change it. However, you can control your business's exposure to fluctuations in interest rates, making this a potentially useful KPI.

Importance of KPIs in business

KPIs drive performance improvements by enabling you to:

• spot potential problems or opportunities
• set targets for business and staff that will deliver your strategic goals

Find out how to set business performance targets.

How to measure KPIs?

After defining which KPIs are most relevant to your business, determine the best methods to measure and assess them. It can help to break down the assessment into more manageable components and measure each separately. You must monitor KPIs regularly for them to be effective. Computer-based management information systems are available to help you accurately measure and report on your KPIs.

Measurement of financial performance is an important part of running a growing business. Many businesses fail because of poor financial management or planning.

Financial performance review

A financial performance review can help you examine your business goals and plan effectively for improving the business. When carrying out a financial review of your business, you should consider:

• Cashflow - this is the balance of all of the money flowing in and out of your business. You should regularly review and update your forecast. See cashflow management.
• Working capital - have your requirements changed? If so, try to determine why and assess how this compares to the industry standard.
• Cost base - keep your costs under review. Make sure that your costs are covered in your sale price - but don't expect your customers to pay for any business inefficiencies. See how to price your product or service.
• Borrowing - what is the position of any overdrafts or loans? Can you use cheaper or more appropriate forms of finance? See borrowing finance for your business.
• Growth - do you have plans in place to adapt your financing to accommodate your business' changing needs and growth? Read more on financing growth.

Financial performance measures

One of the most important financial areas you should review is your profitability. This is your capacity to make a profit, ie generate revenue that exceeds your overall expenditure (all costs, taxes and expenses). Most growing businesses ultimately target increased profits, so it's important to know how to analyse your profitability ratios.

Profitability ratios

Profitability ratios typically fall under two broad categories: margins and returns. Most common profitability ratios are:

• Gross profit margin - how much money is made after direct costs of sales have been taken into account, or the contribution as it is also known.
• Operating expenses margin - this lies between the gross and net measures of profitability. Overheads are taken into account, but interest and tax payments are not. For this reason, it is also known as the EBIT (earnings before interest and taxes) margin.
• Net profit margin - this is a much narrower measure of profits, as it takes all costs into account, not just direct ones. All overheads, as well as interest and tax payments, are included in the profit calculation.
• Return on capital employed - this calculates net profit as a percentage of the total capital employed in a business. This allows you to see how well the money invested in your business is performing compared with other investments you could make with it, like putting it in the bank.

Accounting ratios to measure performance

As well as measuring profit, you should consider other standard financial ratios to help you to analyse your business' performance. These ratios look at:

• liquidity - assessing your ability to meet your short-term financial obligations
• solvency - measuring long-term debt against assets and equity to determine financial stability
• efficiency - measuring things like stock turnover to determine how well you are using your business assets

Measuring these ratios against industry averages, previous years and competitors can help you identify problems and issues within your business. See how to use accounting ratios to assess business performance.

Customer-focused performance is a business approach to measuring performance in terms of customer retention, customer satisfaction, service response time, etc. Under this approach, all processes in your business are tailored to meet customer requirements and satisfy their expectations.

Customer-focused KPIs

To measure the performance of a customer-focused business, your key performance indicators (KPIs) should also be customer-centric. Some common metrics to track are:

• customer satisfaction score - eg through numbers, stars, smiley faces, etc
• net promoter score - measures how likely your customers are to recommend you
• first response time - the speed of response is a great market for customer satisfaction
• customer retention rate - your ability to keep a customer over time
• quality of service - including reliability, assurance and responsiveness
• employee engagement - staff motivation can affect the quality of customer service

When reviewing your business' performance, as well as customer satisfaction, you'll need to assess your customer base and market positioning as a key part of the process.

See how to use KPIs to assess business performance.

A strategic business review can help you re-evaluate market factors such as:

• changes in your market
• new and emerging services
• changes in your customers' needs
• external factors such as the economy, imports and new technology
• changes in competitive activity

Importance of customer feedback

Customer feedback is essential - the more you know about what your customers think and want, the easier it will be to handle them. Look for as many ways of capturing this information as possible, including:

• sales data - what your customers choose to buy (or not to buy) provides the clearest indication of their preferences
• complaints - but remember that many customers will simply switch suppliers before making a complaint
• questionnaires and comment cards - a very useful source of information, so consider using incentives to encourage more customers to complete them
• mystery shopping - having someone pose as a customer for research purposes can give a very clear sense of how well you are performing

Asking for customer feedback helps to identify where you can make improvements to your products or services, your staffing levels or your business procedures.

See how to gather customer feedback.

Manage customer information and relationships

Customer relationship management (CRM) software can be a powerful tool for capturing and analysing information about your customers and the products and services they purchase. CRM also enables you to push up customer service levels by ensuring that all customer-facing staff have ready access to each customer's history.

Grow your customer base

Selling more to existing customers might be the easiest way of increasing sales, but most businesses aiming for significant growth will need to find ways of reaching new groups of customers. Knowing more about sections of the market you haven't yet tapped is crucial. See how to retain and grow your customer base and increase your market share.

As your business grows, the number of people you employ is likely to increase. To keep on top of how your employees are doing, you may need to find ways of efficiently measuring staff performance. Some common ways include:

• one-to-one meetings
• staff meeting
• appraisals
• end-of-year or 360 reviews

Meetings and appraisals

Informal meetings and formal appraisals provide a very practical and direct way of monitoring and encouraging the progress of individual employees. They allow frank exchanges of views by both sides. You can use them to increase productivity and performance by setting employee targets and measuring progress towards achieving them.

See more on managing the performance of your staff.

Regular staff meetings can also be a very useful way of keeping tabs on wider developments across your business. These meetings often give an early indicator of important concerns or developments that might otherwise take some time to come to the attention of your management team.

KPI metrics for employee performance

Looking at employee performance from a financial perspective can be a valuable management tool. The most commonly used measures in this area are:

• sales per employee
• contribution per employee
• profit per employee

These measures are not an alternative to the broader appraisals but can flag up issues that you might later want to explore in more detail during the formal performance management process.

Expressing employee performance in quantitative measures is easier for some sectors and for some types of workers. For example, it should be quite easy to see what kind of sales an individual salesperson has generated or how many units manufacturing employees produce per hour at work.

But with a bit more effort, you can apply these kinds of measures in almost any business or sector. For example, using timesheets to assess how many hours an employee devotes each month to different projects or customers under their responsibility gives you a way of assessing what the most profitable use of their time is.

Download a sample performance review form (DOC, 23K).

Performance benchmarking involves systematically measuring and comparing your business performance to that of other businesses, often in the same industry or sector.

What is benchmarking in performance management?

It is a valuable way of identifying best practices that other businesses, including your competitors, utilise to enhance their performance. By benchmarking against them, you can find areas for improvement or adapt specific best practices to increase one or more aspects of your own business performance.

By carrying out performance benchmarking, you should aim to answer the following questions:

• Who is the best performer in your sector/industry?
• What makes them the best?
• What lessons can you learn from them?
• What actions can you do to improve performance?

You can carry out a benchmarking exercise as a one-off event or as a continuous process.

Types of benchmarks in performance management

A benchmark describes the 'best in class' performance that a specific business process or activity has achieved. Benchmarks can be:

• internal - comparing internal operations within the same company (eg evaluating absenteeism rates across the business, or one site or team against another)
• external - against a specific competitor for a specific product, service or activity
• generic - comparing same/similar functions or processes, regardless of industry/sector

When choosing the specific benchmarks for your business, you should focus on those areas that drive business success in your sector - your key drivers. These will typically be similar to your key performance indicators.

Find businesses to benchmark against

It is usually helpful to compare yourself against businesses in the same sector. However, your market position and your objectives, among other things, will affect the specific comparisons you want to make.

For example, a small business in a crowded sector may want to benchmark itself against average performance levels in the sector, but a business targeting rapid and significant growth may choose comparisons with an established market leader.

See also competitor analysis.

Find external benchmarking data

The most common challenge with benchmarking is finding external data for your comparisons. There are a number of sources for this kind of information. You can:

• with Invest Northern Ireland
• contact your - they often collate sector-wide statistics
• use commercial market reports - they offer great detail but can be costly

Using your benchmarking data

You should use benchmarking data in the same way you use any other performance measurement data you generate - to drive improvements in the way your business operates. Typically this will involve setting business performance targets to help you reach the benchmark values to which you aspire.

Measuring business performance will not drive your business forward by itself. For long-term success and improved performance, you will have to align your metrics and key performance indicators (KPIs) with clear targets and goals.

Importance of setting targets in business

Each KPI you measure should have a target or goal associated with it. Without meaningful targets, you won't get a clear idea about how your business is doing. For example, you may not know:

• if you're on track to achieving your strategic goals
• if your productivity is improving or decreasing
• if your customer satisfaction is dropping
• if your profits are falling or growing

Setting SMART targets

Your business goals and targets should be SMART:

• SPECIFIC - To make your goals effective, you need to make them specific. You should answer questions like what needs to be accomplished, who's responsible for it and what steps should be taken to achieve it?
• MEASURABLE - Quantifying your goals and making sure you can accurately measure them will make it easier to track and evaluate your progress.
• ACHIEVABLE - You need to set ambitious targets that will motivate and inspire your employees. Look back at your recent performance to get a sense of what is feasible.
• REALISTIC - Setting realistic targets means being fair to the people who will have to reach them. Make sure you only ask for performance improvements in areas that your staff can actually influence.
• TIME-BOUND - People's progress towards a goal will likely be quicker if they have a clear sense of deadlines against which their progress will be assessed.

Find out how to decide which key performance indicators to measure.

Assigning responsibility and resources for targets

After you set your business targets, you should assign clear responsibility for delivering each of them. Your top-level strategic objectives may be abstract and business-wide. However, your KPI targets should be concrete and clearly owned by a department or individual.

Hitting your targets is unlikely to be a cost-free process, so be ready to make the necessary resources available when needed. Also, undertake regular reviews to assist with motivation and to make changes if the progress made isn't as expected.

Reviews and continuous improvement

It is important to regularly review how the targets are working and allow for any adjustments. It is likely that you will need regular reviews, updates and revisions to your business plan and targets in order to maintain performance and business success.

A planning cycle can enhance your ability to make changes in your business routine if necessary. Good planning helps you to anticipate problems and adapt to change more easily. See how to prepare a business plan for growth.

If you need expert 91Ï㽶»ÆÉ«ÊÓƵ with assessing your business performance or setting targets, you can appoint a non-executive director or seek help from skilled management consultants.

Competitor analysis or competitive intelligence is a strategic assessment of the strengths and weaknesses of rival businesses. It is a key tactic for finding out what your competitors are doing and the level of risk they pose to your business. Such analysis involves collecting publicly available information through things like market research, financial filings, online databases, press coverage, market reports or benchmarking data.

Importance of competitor analysis

Competitive analysis can help you:

• understand the marketplace conditions in your industry
• refine your business strategic direction
• spot gaps in the market
• spot opportunities for differentiating your products and services
• analyse competitor's product development initiatives

The type of competitor information that you may find useful depends on the type of your business and the market you're operating in. Ideally, your analysis will answer questions on:

• who are your competitors
• what they offer
• how they price their products
• how the profile and numbers of their customers compare to yours
• what their competitive advantages and disadvantages are compared with yours
• how they may react to your market entry, product or price changes, etc

You will probably find it useful to benchmark your business performance and evaluate strengths, weaknesses, opportunities and threats to your business - this is known as SWOT analysis. This will show you how you are doing in relation to the market in general and specifically your closest competitors.

How to gather competitive intelligence

There are three main ways to find out more about your competitors:

• What they say about themselves - sales literature, advertisements, press releases, shared suppliers, exhibitions, websites, competitor visits, company accounts.
• What other people say about them - your salespeople, customers, local directories, the internet, newspapers, analysts' reports, market research companies.
• Publicly available business information - eg trade or sector bodies, or enterprise agencies may have some information available.
• Commissioned market research - you can contract a commercial company or commission specific market research via an organisation such as the .

Business in Northern Ireland may get help from Invest Northern Ireland with .

Business analysis models are useful tools and techniques that can help you understand your organisational environment and think more strategically about your business. Dozens of generic techniques are available, but some are used more frequently than others do. These include:

• SWOT (strengths, weaknesses, opportunities, threats) analysis
• PESTLE (political, economic, social, technological, legal and environmental) analysis
• scenario planning
• Porter's Five Forces framework

SWOT analysis

SWOT analysis is one of the most popular strategic analysis models. It involves looking at the strengths and weaknesses of your business capabilities, and any opportunities and threats to your business.

Once you identify these, you can assess how to:

• capitalise on your strengths
• minimise the effects of your weaknesses
• make the most of any opportunities
• reduce the impact of any threats

See our SWOT analysis example.

A SWOT analysis gives you a better insight into your internal and external business environment. However, it does not always prioritise the results, which can lead to an improper strategic action.

One way to make better use of the SWOT framework is to consider the customer's perspective when making strategic plans and decisions. You can do this by applying importance-performance analysis to identify SWOT based on customer satisfaction surveys.

Other strategic analysis tools

In addition to SWOT, other useful techniques include:

• PESTLE analysis - a technique for understanding the various external influences on a business. See our PESTLE analysis example.
• Scenario planning - a technique that builds various plausible views of possible futures for a business.
• Critical success factor analysis - a technique to identify the areas in which a business must succeed in order to achieve its objectives.
• The Five Forces - a framework for looking at the strength of five important factors that affect competition - potential entrants, existing competitors, buyers, suppliers and alternative products/services. Using this model, you can build a strategy to keep ahead of these influences.

Read more about strategic planning for business growth.