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Performance Management Checklists

Assessing Business Performance


Checklist Description

This checklist outlines how to assess business performance.

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Definition

Regular assessments of business performance are vital. It is easy to lose direction and focus only on the day-to-day development of your business. Longer-term and more strategic planning is necessary to get the most out of your business and market opportunities.

Companies need to:

  • Review their activities and reevaluate the products that they make or the services they provide. Why are these products or services successful? Are they priced correctly? What could be improved? Is there a market for new or complementary products or services?

  • Assess business efficiency. How do you compare with the competition? Are your IT systems adequate? How flexible are your structures? How well do you address customers’ needs? Do you have in place an appraisal system for investment opportunities?

  • Assess staff. Do you have a high turnover of staff? Are they motivated? Are their skills adequate, or do they need retraining?

  • Redefine goals. Where is the business now, where is it going, and how is it going to get there?

  • Companies should review their financial statements to help assess their performance:

  • The profit and loss statement tells the company whether it is making a profit, as it indicates how revenue is transformed into net income.

  • The balance sheet shows assets, liabilities, and shareholders’ equity/capital.

  • The cash flow forecast or statement identifies the sources and amounts of cash coming into and going out of a business over a given period.

Another way to assess a company’s performance is to employ ratio analysis, which uses a combination of financial and/or operating data as a basis for making comparisons with other companies:

  • Liquidity ratios give a measure of how readily a company can meet its obligations.

  • Profitability ratios give an indication of the earnings and profitability potential of a company.

  • Asset management ratios gauge how efficiently a company can change assets into sales.

  • Debt management ratios indicate how debt-leveraged a company is, and how it can manage the debt in terms of assets and operating income.

  • Dividend/market value ratios measure how well a company uses its assets to generate earnings.

  • Profitability ratios indicate earnings and potential profitability.

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Advantages

  • Regularly assessing business performance allows for longer-term and more strategic planning, which is necessary to optimize business and market opportunities.

  • Ratio analysis permits analysts to read between the lines of financial statements and identify a company’s strengths and weaknesses.

  • Financial ratios provide lead indications of potential problem areas and allow corrective measures to be taken.

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Disadvantages

  • Profit and loss statements do not report factors that might be highly relevant but cannot be reliably measured (for example, brand recognition and customer loyalty).

  • A balance sheet shows a snapshot of a company’s assets, liabilities, and shareholders’ equity. It does not show the flows into and out of the accounts during the period.

  • Financial ratios are based on past performance; they cannot take into account future events.

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Action Checklist

  • What direction should the company take over the next three to five years?

  • What are the company’s markets, and how should it compete?

  • How can the company gain market advantage and compete better in the future?

  • What resources will be needed in assets, finance, staff, etc.?

  • Obtain as much information and compare as many ratios as you can when assessing a business’s performance.

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Dos and Don’ts

Do

  • Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as nonrecurring items and inventory or pro-forma adjustments. In many cases, these adjustments can significantly affect the ratios.

Don’t

  • Don’t rely solely on ratios when taking decisions. Use market research to confirm the results.

  • Don’t fall into the trap of thinking that financial ratios are infallible.

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Further reading

Books:

  • Porter, Les, and Steven Tanner. Assessing Business Excellence. 2nd ed. Oxford: Butterworth-Heinemann, 2004.
  • Young, Peter C., and Steven C. Tippins. Managing Business Risk: An Organization-Wide Approach to Risk Management. New York: AMACOM, 2000.

Websites:

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