Understanding Metrics: A Business Management Term Definition
Businesses rely on metrics to measure performance over time and monitor progress towards achieving key goals. Financial metrics drawn from accounting measures 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 another process, such as service or quality measurements important to monitoring the organization's health and success.
Common Types of Financial Metrics
There are a wide variety of well-defined financial metrics, measurements, and ratios 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. A partial list of these types of measures includes:
- Measures of customer satisfaction measures, including net promoter score.
- Measures of employee engagement or satisfaction.
- Quality metrics.
- Measures of learning and developments.
Why Use Financial and Non-Financial Metrics
Both financial and non-financial metrics do an excellent job identifying problems or showcasing strengths. They tell you that something has resulted in a poor or positive outcome.
However, they do not point specifically to the behaviors 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.
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 fine-tune programs and investments to ensure the ongoing strengthening of the metric.
Beware of Too Many 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.
The Bottom Line
The famous quality management expert, W. Edwards Deming offered, "Without data, you are just another person with an opinion." Data and the organization of it into performance metrics and scorecards is a critically important task in today's organization. Nonetheless, managers are cautioned to remember that, "what gets measured gets done." Choose your metrics and measurements carefully.