Measure performance and set targets

Measurement of financial performance is an important part of running a growing business. Many businesses fail because of poor financial management or planning.

Review your financial performance

A financial performance review can help you assess your business goals and plan improvements. When reviewing your finances, consider: 

• Cashflow - this is the balance of money coming in and out of your business. You should regularly review and update your forecast. See cashflow management.
• Working capital - check if your funding needs have changed and compare with industry standards.
• Costs - monitor your cost base and make sure your sale prices cover all expenses. See how to price your product or service.
• Borrowing - review loans and overdrafts and consider cheaper or more suitable finance options. See borrowing finance for your business.
• Growth - make sure your finances can adapt as necessary and support future business growth. Read more on  financing growth.

Key financial performance measures

Profitability is one of the most important measures of business performance. It shows your ability to generate profit after covering all costs. To assess profitability, use financial ratios.

Profitability ratios

Profitability ratios typically fall under two broad categories: margins and returns. Most common profitability ratios are:

• Gross profit margin - profit after direct costs of sales.
• Operating profit margin - profit after operating costs, before interest and tax. Also known as the EBIT (earnings before interest and taxes) margin.
• Net profit margin - profit after all costs, including tax, overheads and interest.
• Return on capital employed - how effectively your business uses invested capital.

Accounting ratios to measure performance

In addition to profitability, use other financial ratios to measure performance:

• liquidity - your ability to meet short-term financial obligations
• solvency - your long-term financial stability
• efficiency - how well you use business assets, such as stock turnover

Measuring these ratios against industry averages, previous years and competitors can help you identify problems and issues within your business. See how to use accounting ratios to assess business performance.