by Merlin Hernandez

Small businesses tend to concern themselves with issues of revenue growth, managing their human resources, rising costs, marketing strategies, and maintaining healthy cash flows. And this is as it should be. But there is often an absence of specifics in the level of planning that lays down the pathways to achieving desired goals. Businesses need to make decisions that can reduce risk, improve performance, and enhance the return on their investment. Decisions need to be predicated on an understanding of key performance indicators that provide a continuous mechanism to show what is working, what is not, and which areas need improvement.

Investment in technology and computer systems, websites, search engine optimization, and social networking has emerged as vital in today’s business environment. But businesses also need to plan for success by establishing performance standards. Standards may be based on a combination of resource capabilities, industry benchmarks, and desired outcomes which are translated into the performance indicators like expense-to-revenue ratios or customer satisfaction ratings. Performance metrics afford better monitoring and control of activities to inform better management decisions.

Small businesses often do not tie the specific numerical metrics to their mission and objectives that will allow the monitoring of efficiencies and shortfalls so that targets remain the focus of all business activities. Performance measures quantify the requirements for achieving goals and enhance attainability by disaggregating the larger vision into actionable pathways of a more granular nature e.g. resources-to-output ratios, time-volume considerations, or employee morale index.

Quantifying the requirements for a desired result ensures that the process is repeatable and sustainable and can be adjusted to accommodate changes in the environment. Metrics must also contain indicators to express qualitative criteria like employee engagement or customer satisfaction using numerical rating or ranking scales. Performance metrics establish an unambiguous frame of reference that the business sets out to achieve or surpass and presents a clear roadmap for employees and managers to follow. They also create an objective platform for evaluating both business and employee performance.

But perhaps the most important benefit to decomposing the performance requirements for the business is that the process readily bares attendant risks. It facilitates deeper insights into the interrelationships among inputs and highlights potential imbalances – resources/allocations must support desired outcomes e.g. can production capacity support the desire to increase revenues by expanding market reach. A change in consumer demand may require additional or new resources e.g. would overtime be more costly that hiring new entry level employees in order to respond appropriately to the change. Performance metrics provide the raw material for the kind of cost-benefit analysis that forms the basis of risk management.

Decision making also comprises analyzing risk and probabilities in order to hedge strategies and minimize uncertainty. The quantifying of risks through performance indicators can tie back to financial and other projections and give a better analysis of the potential to maintain solvency.