Firms use business metrics to measure performance over time and monitor their progress toward achieving key goals.
Learn more about the kinds of data and information organizations gather when tracking their performance.
What Are Business Metrics?
Business metrics are measures that are used to gauge a firm's performance.
Financial metrics are drawn from accounting measures to help management, shareholders, and key stakeholders assess an organization's overall financial health at a specific point in time as well as monitor the improvement or decline in health over a period.
Non-financial metrics can focus on other aspects such as customer loyalty, process effectiveness, or employee satisfaction.
Metrics that target a particular business objective are called key performance indicators (KPIs). KPIs measure an organization's effectiveness in terms of strategic goals.
There is a wide variety of well-defined financial metrics, measurements, and ratios that are used by accountants, financial experts, and investors to assess and monitor the health of businesses. Investors and shareholders watch these measures closely to assess valuation and to monitor management effectiveness.
Commonly referenced financial metrics expressed in the form of ratios include the following:
- Liquidity ratios help businesses monitor their ability to fund operations and pay bills. These metrics are watched closely to ensure the firm can meet its short-term obligations.
- Financial leverage ratios help businesses understand the impact of debt on their overall financial structure. These ratios help shareholders and stakeholders assess financial risk.
- Asset efficiency ratios gauge how effectively management is using the assets of the firm to drive revenues and profits. These measures are evaluated over time to assess improvement or deterioration in asset utilization.
- Profitability ratios assess the effectiveness of management in driving earnings from the capital invested in the firm. These numbers are critically important to investors and shareholders.
Non-Financial Performance Measures
In addition to the measures and ratios used to gauge an organization's financial health, management teams work to develop and fine-tune a set of non-financial performance metrics and measures that assess the health of key functions, services, processes, and initiatives. For example:
- Measures of customer satisfaction
- Measures of employee engagement or satisfaction
- Quality metrics
- Measures of learning and development
How Do Business Metrics Work?
Both financial and non-financial metrics do an excellent job identifying problems or showcasing strengths. They tell you when something has resulted in a poor or positive outcome.
Metrics are measurements of a particular outcome. However, they do not point specifically to the behaviors or causes that either created the problems or resulted in the gains.
Management teams work to develop a blend of different metrics that showcase outcomes as well as offer clear evidence pointing to the areas of strength or challenge.
For example, a retail company's management team might track a number of metrics and use them as they make key business decisions. They might use sales revenue, cost of goods sold, and cost of customer acquisition to inform their marketing strategies, for example.
Metrics and Scorecards
Often, metrics are collected and displayed in a format called a scorecard. The scorecard consists of those metrics agreed upon by management as the most important leading and lagging indicators of business performance.
This scorecard is used by a firm's functional managers to identify areas to improve and to evaluate the effectiveness of prior investments and changes. Developing a scorecard takes time and ample fine-tuning.
Ideally, management teams prefer to identify metrics that foreshadow positive changes in financial results at some point in the future. These leading indicators help management teams adjust programs and investments to ensure the ongoing strengthening of the metric.
Criticism of Business Metrics
It is tempting to measure everything, but in reality, there is a limited subset of metrics that offer the best indicators of organizational health and potential. It is possible to pursue a false level of precision, where increasing the level of detail of a particular metric fails to deliver meaningful information or insight in return.
Managers are encouraged to work to identify the most important metrics that gauge the success or failure of prior decisions, and that foreshadow business improvements based on recent decisions.
- Business metrics are the measurements a company uses to track its progress toward performance goals.
- Data and the organization of it into performance metrics and scorecards is a critically important task in an organization.
- To get a complete picture of an organization's health requires evaluating a number of different metrics.