Business performance measures and metrics are a set of quantifiable measures and metrics taken from various sources of information on your business that, when analyzed, allow for management to track and assess the current status of a specific business project or process.
In a nutshell: performance measures give you the tools to measure your business. Because, bottom line, what gets measured gets paid attention to and managed.
So what measures should you be looking at? We’ve talked about budgeting, benchmarking, and KPIs in past episodes but today we’ll talk about common size ratios.
Common size ratios are a metric that allows you to compare your business with basically any other business regardless of size. Small company? You can use common size ratios to compare yourself to billion dollar companies. How? By calculating each line item as a percentage of the total. Then, it doesn’t matter what size your company is because you’re comparing percentages not absolute dollar values.
You can compare your common size ratios to your competition, industry averages, larger companies, or other benchmarks. You can look at all different kinds of areas from advertising expenses to labor costs to cost of goods sold.
And actually, gross profit margin and bottom line are well-known common size ratios. All we’re doing is extending those measures to every line item on your income statement to make meaningful comparisons, regardless of company size.
This allows us better decision making and to really manage our key numbers.
Using common size ratios has a huge benefit to you as a business owner because the more we know, the better we can manage, and the better decisions we can make for our businesses as well as understanding the financial health of our companies.