subject: Small Businesses - Measuring Business Performance From The Financial Perspective [print this page] Small Businesses - Measuring Business Performance From The Financial Perspective
Measuring your business performance from the financial perspective is an absolute must for any business, regardless of its size. It will pay entrepreneurs to become intimately familiar with the Key Performance Indicators used to measure, monitor and provide the actionable insights needed to keep your financial performance on track.
According to the creators of the Balanced Scorecard approach, Robert S. Kaplan and David P. Norton, there are four perspectives by which you should measure your business performance. The customer perspective, the financial perspective, the internal business processes and the learning and growth perspectives.
Financial objectives and measures define the financial performance expected from the business strategy. If done correctly these objectives and their associated key performance indicators, should align with the strategic intent outlined in the business plan.
Financial objectives change with each stage of the business life cycle. The three typical stages of the business life cycle are growth, sustain and harvest. Given that most small businesses are in the growth phase we will examine this stage.
Growth businesses are in the early stages of the business's life. They have products or services with significant growth potential. Typically, to capitalise on this potential, they require significant investments in terms of resources, time, infrastructure development, and the development of key business networks.
Two key financial objectives and measures that should be front and centre on any management performance dashboard, is the net profit metric. Your first goal as a business is to be profitable - not in a year's time or five year's time but today.
Measuring revenues is all well and good but it is entirely possible to have outrageous sales revenue and still run your business into the ground. Net profit metrics and cashflow are as important to your business as the oil in your car is.
Like the engine of your car, your business, without sufficient cash, will come to a grinding, disastrous halt. So on that basis the second measure I recommend is the cashflow days-to-disaster metric. This metric calculates your cash reserves (in terms of number of days you can survive should nothing change) based on projected inflows and outflows.
The key financial objectives for a business in the growth-stage will largely be percentage growth rates in revenues, and sales growth rates in targeted markets, customer groups and regions.
Effective financial management of your small business should also address risk, as well as return. Objectives relating to growth, profitability, and cash flow emphasize improving returns from your initial investment should also include measures that identify risk factors, such as profit reliance on a key product or service, or even on a few key customers.
For businesses learning to take flight these financial objectives and measures will keep you focussed and on track for growth.
Karen L. Paiyo is an Australian Small Business Counsellor, supporting and nurturing the spirit of entrepreneurship in the Asia Pacific Region. Karen empowers small business o
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