Measuring the core aspects of your business is a good practice when identifying the strengths and weaknesses of your business. Doing so, will help you to create an action plan focussing on improving areas of weakness and doubling down on strengths so that your business can continue to grow and flourish.
There are non-financial as well as financial factors that need to be considered when measuring performance. Here are three factors to consider when measuring performance:
- Measuring the level of productivity
- Measuring customer retention rate
- Measuring profitability
Productivity is an important measurement when looking at the efficiency of your business. To be able to grow and scale your business, you need to be able to maximise output with the resources you have available. Measuring productivity will help you identify the areas that you need to improve in order to become more productive.
The formula for calculating productivity is simple. Productivity = output / input.
However, applying this to your business might not be so simple and it will vary depending on the industry you are operating in. For example, if you are measuring the productivity of an employee who is not responsible for producing a physical good, this can become more complicated. This is typically the case in service-based industries.
Alternatively, businesses will use timesheets to record the hours spent completing tasks on certain projects. This way they can measure the cost being spent on each client.
Overall, measuring productivity can have a range of benefits for your business. You will be able to monitor the level of output within your team and also measure the level of service that is being delivered. However, there are a few challenges associated with measuring productivity including; accuracy and the invasion of staff privacy.
Measuring customer retention rate
Measuring customer retention rate can tell you a lot about your business and it can define a business’ success. It takes a lot of time, effort and money to acquire new customers, so when you do receive them, its important to keep hold of them. If you are not able to keep hold of them then you may have problems in customer service, marketing, the quality of product or even the quality of your internal processes.
Once again, its very straightforward formula when calculating customer retention rate.
(# of customers across a period / Total # of customers in the previous period) x 100
If you have a low customer retention rate, you will need to start investigating the weaknesses in your business so that you can start improving the number of customers you retain.
Once you know the areas of your business that are letting you down, you can start to allocate resources more efficiently so that your weaknesses soon become strengths.
Measuring profitability can be slightly more complex than just subtracting costs from revenue. In fact, there are several different profitability ratios that help businesses to measure which areas are doing well and which areas are struggling. Profitability ratios are also useful when forecasting future profitability.
We won’t go into full detail on all the profitability ratios in this article but you can find out more here.
Sorry to state the obvious, but businesses rely on profitability. Without it, businesses will not be able to survive and they certainly won’t be able to thrive. Using the profitability ratios will allow you to forecast future profitability and begin creating your action plan so that you can work towards growing the business.
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