Many modern economists and entrepreneurs often ask questions regarding the concept of business performance. The topic is rather complicated due to its specifics. It is very important to define the very concept of effectiveness. In simple terms, we will talk about a qualitative or positive result in the process of any activity. In part, this statement is true.
However, such questions require more in-depth research on the topic, because the assessment of business performance should include not only a verbal description of the activity, but also various generally accepted economic and mathematical formulas. Still try to figure it out.
Efficiency
The economic meaning of this term is characterized as the ratio of the spent funds to the achieved result. In other words, this is a result divided by costs.
Let's try to give an example: an enterprise is engaged in the processing of metal products. 100 parts were processed. The final cost of one part is 2 rubles. The cost of one part, taking into account the processing process, is 1 ruble. It turns out that the efficiency of this production will be 1.
This is the most trivial of examples. The fact is that in modern business, performance is not only and not always understood as performance.
This may be the number of sales, and profitability, and even the number of manufactured products. Such an assessment requires a rather narrow approach.
Each industry can have its own indicators of business performance , which practically does not allow a concrete definition of this concept.
If we again return to the examples and take the IT company, then its effectiveness can be easily estimated by the audience reach or by the number of users. If we consider a marketing agency, then there may be several indicators, for example, audience coverage, event performance.
There is an opinion that business efficiency is its stable and well-functioning operation without any problems.
Rating
When evaluating a business, a huge number of qualitative and quantitative indicators are used. You can evaluate the company as a separate production and property complex, not including the business processes themselves in its value. In other words, property is considered literally. Other business valuation methods include working capital, revenue, net income, development potential, and many other aspects that are often ignored in the cost of the enterprise.
Professional consultants, for example, firms such as KPMG or Deloitte, can more fully evaluate business performance. They are able to analyze even the most exotic indicator and help the business owner make the right decision.
Ways to increase efficiency
Any enterprise has its own life cycle, and it is very important to determine in time the stage at which the company is located. If we take into account the classification of business life cycles according to Adizes (nursing, youth, active work, stability, aging, bureaucracy and ultimately death), it is very important to determine in time the stage at which the enterprise is located. Further ways to increase efficiency will depend on the coordinated actions of the staff and the manager. It is very important to overcome the crisis in time or to prevent its occurrence.
Other classic ways to increase business efficiency will include fairly simple things like cheaper products, working on product quality, and optimizing costs.
Much attention should be paid to your partners and suppliers. In addition, the introduction of logistics structures in the business will also have a positive impact on its effectiveness.
Analysis
Usually this section includes a description of the activities of the enterprise in its industry. Analysis of business performance requires a lot of attention to be given to such data as market size and the share of products in it. In addition, the level of demand for goods manufactured by the enterprise is often analyzed. This can also include the number of employees, equipment and other production factors.
If the activity is related to the provision of services, then similar enterprises, availability, price factors are compared.
In addition, the assessment of business performance may include an audit of accounting and management accounting and other indicators.
Simple Methods for Small Businesses
As for small business, you should not reinvent the wheel here. Do not invent yourself unnecessary difficulties. If you do not need a bank loan, and things are going relatively well, it is better not to waste time on various discounted rates of return and other rather complicated methods that are inappropriate to determine the effectiveness of a small business due to its cumbersomeness and difficulty.
In such cases, it is better to use classic indicators, such as, for example, profitability or the ratio of own and working capital.
To determine how you are doing, it is best to conduct a SWOT analysis. The abbreviation hides in itself such words: "strengths", "weaknesses", "opportunities" and "threats". It is enough to divide the board or sheet into four columns and write out three examples for each item that are somehow related to your case. Perhaps you will discover some details or learn about obvious problems that did not have enough time, and new useful information and improving business efficiency are almost synonymous.
Project Evaluation
If you touch on the topic of economic feasibility of any project, then a large number of formulas and a feasibility study are applied to them. A similar approach is used when considering the effectiveness of a business plan.
For example, before embarking on a project, they often evaluate the economic effect. Even if it is not a commercial activity, the result should ultimately overlap costs and be positive. Otherwise, such a project would be inappropriate.
The main indicator of project evaluation is the discounted value of cash resources, that is, the future value of investments, taking into account such factors as inflation. This formula is called NVP, it is quite difficult to understand, so it is best studied in the textbook of investment management. In addition, the effectiveness of a business project includes various indicators of payback and other expert methods.
Business planning
Sometimes it is isolated in a separate area. If you decide to develop your business, you will need a document such as a business plan.
In the absence of a rigidly fixed form, only a number of recommendations will be given below, because the effectiveness of a business plan depends largely on its competent completion.
In many ways, it is similar to the feasibility study. As a rule, the business plan describes the essence of the planned business, its goals and objectives. A certain forecast is also made for your type of activity, whether it is the sphere of trade, services, work. In the latter case, entry into the SRO may be required . This is such a self-regulatory organization, notaries, lawyers and engineers join it. For many construction works, membership in such an organization is the responsibility of the company.
In addition, the payback periods, various scenarios and prospects of the developed idea should be written in your business plan.
Performance management
Speaking of such models, often implies foreign techniques related to time management and goal setting. In addition, this area is intertwined with strategic planning. It is referred to as follows: performance management system. In general, these are classical management techniques, such as time management, general meetings, and goal setting using SMART criteria. As you may have guessed, each letter denotes a foreign word that is related to the goal setting. Namely: specific - special (useful for the organization); measurable - measurable (in numbers, for example, 5 pieces or 10 days); achievable - (possible, physically feasible); relevant - (relevant); time-based (clear time frames).
In general, the SMART criteria methodology proves to be quite useful for both employees and companies. It is used in various educational institutions, large corporations, and sometimes in small businesses. Due to its simplicity, it allows to improve business performance management.
There are other techniques. For example, decomposition. An incomprehensible word can scare the reader a little, but not everything is so complicated. The essence of this process is to break down various business tasks into smaller components, down to the level of ordinary workers. It turns out that the whole control system is broken up, all its branches are from top to bottom, what is related to the set goal is affected. Sometimes decomposition helps to resolve even the most protracted problem.
Indicators
There are no universal or uniform indicators in order to accurately assess business performance. Enterprises create such indicators on their own. They are called KPIs. It is an abbreviation in English that translates and stands for "key performance indicators."
KPIs should include all the basic aspects of a particular type of activity, for example, this may be the number of completed orders.
Again, the key performance indicators of business processes are data that are completely individual for each type of activity. The most important rule: that they are quantifiable. For example, five applications or one hundred orders.
There are also classic KPIs that many giant companies use. These include turnover indicators, production volumes on the market, NPV (net asset value), and the efficiency of one employee is also calculated.
There can be a lot of indicators.
Recommendations
Business performance is not indicators and reports at all. They, of course, play a crucial role in the functioning of the company. However, it should be remembered that first the result appears, and then the indicator and reporting. Many large corporations were defeated due to the fact that top management was chasing key performance indicators, and was not involved in the real development of the company. Any corporations are first of all people and communications, and only then - financial statements. Of course, the company's turnover is important, because without it no company will function, but more importantly, when employees are engaged in real business.
It is important for start-up firms to keep an eye on simpler things, such as a balance sheet, tax reporting, labor laws. It is very important to get comfortable in a business environment before engaging in improving business performance in a formal understanding of this expression. If your business is functioning, that’s good. In this case, you need to develop. But in the presence of crises it is better to wait with all sorts of KPIs and solve more important tasks.
Other techniques
Improving business performance is possible without any difficulties associated with various indexes and formulas. As mentioned above, simple methods of the SWOT analysis type can yield much more than the KPI experience. In addition, there are no less interesting techniques, such as GAP analysis.
GAP translates from English as a gap. The essence of this method is simple. The current situation is taken, for example, the number of services sold and a similar plan for several months in advance. Next, we consider the time period, the countdown of which began from the moment the goal was set. Then managers should monitor the process of achieving the goal, adjust it and save the data for future similar situations.
Another equally effective method would be PEST analysis. It shows the political, economic, social and technical aspects of the environment. This technique is interesting in that it can open up new, previously unnoticed opportunities for the growth of your business, for example, the emergence of technology that will reduce the cost of production, or some social aspect that will affect the demand for your goods. All of these tricks often reveal obvious things.
Summary
Many managers often make a logical mistake, believing that the progress report is much more important than the work itself. However, enterprises produce products not at the expense of a good indicator of net worth of assets, but due to the fact that they perform a production function. Raw materials are bought, processed, packaged, logistics systems are created, and as a result, the product is sold at a premium. After these moments, it’s important to talk about reporting, and not artificially inflate these business performance indicators. It is very important to focus on the functioning of the system, and not on its assessment.
So, business performance is not only a result minus costs, but also dozens of options for various formulas showing how well the organization, its management, and what are its prospects, for example, in a competitive environment or for growth.
If you decide to do business, then the key role should be assigned not to paper work, but to the construction of your business. The choice of the type of activity, the search for suppliers, the analysis of the target audience, the selection of a place for an office and marketing events are important.