Measuring business performance describes an activity that provides you (the business owner) with information that helps you make decisions about your company, and that provides information to other interested parties (e.g., investors, creditors, and potential purchasers). This activity identifies your company’s economic activity by collecting, measuring, classifying, and summarizing data and reducing it to a few, highly significant items that, when properly assembled and reported, describe your company’s financial condition and results of operation. These reports can then be analyzed and used by parties both internal and external to the company.
Put more succinctly, measuring business performance puts a dollar figure on the status of your company so you can know and understand how your business is doing in general and how it should proceed. Measuring business performance lets you plan, evaluate, and control your business. For example, is your company making money? Losing money? Growing? Languishing? Succeeding? Failing? Should your company expand? Purchase a competitor? Should it use financing from operating profits or from borrowing? These are just some of the questions that measuring business performance prompts you to ask.
Some of the accounting and financial reporting principles and procedures that we are discussing must conform to certain requirements. You should seek the advice of an accounting professional to help you accurately measure your business’s performance.
How do you measure business performance?
Measuring business performance can be accomplished in a variety of ways for a variety of purposes. We will only be discussing a few of those ways and purposes here.
Compute the Business Balance Sheet
One of the most helpful ways to measure business performance is to compute the business balance sheet. A balance sheet is a statement of a company’s assets, liabilities, and equity at a specific point in time (sometimes referred to as a “snapshot”). The balance sheet shows, in dollars, what the business owns (assets), what it owes (liabilities), and what the shareholder equity in the company is. Thus, the balance sheet provides you with a picture of the company’s financial condition at a given point in time. The balance sheet allows you to assess the liquidity and financial flexibility of your company (e.g., do you have enough cash to pay the current bills?) and its current capital structure.
Monitor Monthly Financial Statements
Another helpful way to measure business performance is by monitoring the monthly financial statements. The financial statements (e.g., balance sheet, income statement, statement of cash flows, and statement of changes in financial position) provide you with information such as the current capital structure of the business, current and past earnings, and changes in financial position.
Analyze Business Financial Ratios
You can compare your business to other businesses in your industry by analyzing business financial ratios. Using data from your company’s financial statements and industry statistical data available from a variety of resources, you can identify trends, strengths, and weaknesses in the market in general and your business in particular.
Forecast Business Revenue
Forecasting (predicting) your company’s revenues for a future period of time can help you anticipate capital needs and manage expenses.
Track Accounts Receivable
Tracking your company’s accounts receivable helps your company keep sufficient liquid funds and ensures that sales revenues are actually collected.
Keep Records of Travel and Entertainment Expenses
In general, travel and related expenses are deductible. These include (but are not limited to) transportation, lodging and 50 percent of your business-related meals and entertainment expenses. (This limit applies to employers even if they reimburse their employees for 100 percent of the expenses.) The Internal Revenue Service (IRS) watches these deductions very carefully. Keeping records of travel and entertainment expenses helps you keep the IRS happy by ensuring adequate backup for these tax deductions. Additionally, these records help you control and manage these expenses.
If you have questions, contact the experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
