Measuring Business Performance – the Only Three Ratios You Need

A business can thrive forever if it has happy customers, happy employees and happy investors (all at the same time!). Here are three ways to measure how you’re doing:

  • Happy Investors: Return on Capital Employed (ROCE) or Return on Net Assets (RONA)

If you think this is too simple and you’re determined to have lots of Key Performance Indicators (KPI’s), you might want to add some of the following:

  • Operations: Value-Added Ratio or Throughput Efficiency (ratio of Value-Added Time to Total Lead-Time (Dock-to-Dock))
  • Operations: Overall Equipment Effectiveness (OEE)
  • Finance: Return on Sales (ROS) or Net Margin
  • Innovation: Percentage of sales turnover generated by products or services  developed in the last x years (x=2 is common)

The Balanced Scorecard approach has a lot to commend it – a balance of measures including Financial, Operational, Marketing/Sales, and Learning and Growth / Innovation. See  http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

One thought on “Measuring Business Performance – the Only Three Ratios You Need

  1. It’s interesting to consider how ratios and KPIs such as these scale across businesses. At my company, Central Conveyors (http://www.central-conveyors.co.uk if I’m allowed a plug!), we broadly measure the same metrics (external praise, internal contentment, profitability), but also cross-reference these with the four principal tenets of ALL business:
    Innovation
    Marketing
    Quality
    Value

    Without this constant process of cross-reference, it can be difficult to identify where the root of any problems lie and take the necessary remedial action.

Leave a Reply