What Is Measuring Business Performance?
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.
Caution: 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.
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