The performance of a business is a subject of interest to many. Business performance enthusiasts are those who are directly involved in a business. It can be the owners, managers, employees, shareholders, creditors, dealers, distributors and customers. The society in general too is interested, right from the media houses to a layman. Firms, usually the large ones, measure their performance to know the real state of the vast business. Most of them are spread across national boundaries. They want to improve control over various systems and processes within the firm and achieve better results (Kellen, 2003). The performance of a business is usually briefed by adjectives like ‘poor’ and ‘good’. Business newspapers, journals and magazines, websites and blogs frequently proclaim that ‘Company X has recorded poor business performance during 2nd quarter of the financial year’ or ‘Company Y has shown good/excellent business performance for the quarter.’ The term ‘business performance’ is significant for the management because it often forms the basis of important decision making in the firm (Kaufmann, 2012). For people not directly related to the firm, business performance usually serves as a vital criterion for deciding about investing in the firm. Business performance acts as the public image of a firm and hence it is very important that it is measured accurately.
Measuring business performance
Now the question arises ‘is there any universal standard against which the performances of all kinds of firms in every industry can be measured?’ If yes, what is that criterion or factors for measuring business performance of all firms? If no, then how fair it is to analyze a firm on the basis of its business performance results?
Well, the answer is ‘no’. There is no universal criterion on the basis of which a business can be measured for its performance. Measurement criterion differs according to the philosophy of the firm. There are firms which lay emphasis on monetary results. Most of the times, business performance of such firms is measured on the basis of returns on equity (ROE). ROE portrays the returns that a firm has offered to its shareholders. Besides, there are other financial measures also like IRR, CFROI, and DCF that are frequently utilized by firms to measure the performance of their business. The experts at Harvard recommend using return on assets (ROA) instead of ROE because ROE can easily be manipulated to hold shareholders’ interest in the firm. Firms often artificially show a hike in ROE to maintain existing shareholders’ interest in the firm and attract new investors (Hagel III et al., 2010).
Other methods to measure business performance
Besides financial measures, firms can also focus on soft business targets while measuring performance. These may include:
- Corporate social responsibility (CSR) activities of the firm during the stipulated time.
- employee development initiatives undertaken by the firm.
- Level of employee engagement in the firm.
- Leadership and innovation (Kellen, 2003).
It is therefore important to understand as a layman that the performance or well being of a firm cannot be interpreted solely on the basis of financial data. The advent of internet has facilitated business performance measurement through specialized tools designed for the purpose.
- Kaufmann, M. (2012). “The Impact of Corporate Social Responsibility on Business Performance-Can It Be Measured, And If So, How?” The Berlin International Economics Congress 2012, March 7th-10th, 2012.
- Kellen, V. (February, 2003). “Business Performance Measurement.” Retrieved from: http://www.kellen.net/bpm.htm
- Hagel III, J., Brown, J. & Davison, L. (March 4, 2010). “The Best Way to Measure Company Performance.” Retrieved from: http://blogs.hbr.org/2010/03/the-best-way-to-measure-compan/