Benefits of a Performance Plan
What are the benefits of a Performance Plan if you are selling or buying a business?
An area that a lot of businesses don’t spend a lot of time measuring but is very easy, cost-effective, and critical to do is the key performance areas of the business. These key performance areas or metrics can show whether the business has all the parts working together and in a healthy manner or needs a tune-up or radical surgery. There are several key areas to a Performance Plan so let’s break them down.
First: Business Financial Statements
The first and most readily used is the Profit and Loss Statement as it shows the income and expenses of the business with hopefully the income greater than the expenses. Just as important, however, is the Balance Sheet as this document shows the wealth of the business. With an up-to-date profit and loss statement and balance sheet, a trained business appraiser can then calculate what the owner of the business could expect to get if they decided to sell it on the market.
Second: Business Metrics
In addition to the financial statements, the next performance area to measure and manage can be simple business metrics that include the number of incoming calls to the business (and this can be broken down into times of day if call volume is an important metric,) the number of hits to the website, the volume of email, the volume of faxes and volume of orders placed online (if important.) Depending on the business, the total number of orders placed and/or the number of orders placed by each salesperson. In simple terms, sales can generally be easily measured. It’s important that the sales team is clear on sales targets and agree on how they are to be measured. Salespeople are motivated by getting results. Make sure the results are measured accurately, consistently, and fairly or salespeople will become de-motivated; which is the complete opposite of what you want to do. It’s important to start by building Key Performance Metrics for your business. Don’t be afraid to change and add other metrics as they are normally easy to isolate and therefore count.
Make sure all metrics are counted monthly and as many data points are shared with everyone in the business as possible. Celebrate successes and ask the team for suggestions when the performance isn’t acceptable.
Third: Annual Performance Review
The next aspect of a Performance Plan for the business and something not always done is an annual performance review. There are different approaches to this topic; some are personal preferences. For example, some businesses tend to link the annual performance review to also a salary review. My preferred strategy is not to link them. My reason for this is that I don’t think they are linked. Compensating someone on performance is important. However, the good performance of one person does not always mean the business can afford to pay as collectively the business may not be performing well enough. The argument goes that incentives should include as many workers as possible so if they are successful so too will the business, but you can have a top-performing employee that is bringing in the best sales for the business but his demeanor or attitude toward co-workers may not be acceptable.
Therefore, how do you financially reward a top performer during a meeting and then point out behavior or communication problems? Rewarding people for sales is great however, you will lose any goodwill from acknowledging and rewarding great sales and then bringing up negative issues.
If the performance of each employee is measured with an Annual Performance Review an extension of that is to include feedback from the co-workers at the same level as the employee. This is called a Peer performance review. It can be controversial as someone may choose to denigrate the performance of a co-worker they don’t like. So there are risks. However, it can provide constructive results if managed correctly.
A best practice for a Performance Review is asking an employee that reports to a manager their opinion on the performance of the manager and how the manager could do things better. This is called a Management Review. Once again this approach can have a downside but it can enable a business to grow and be internally stronger if open and honest communication is part of the business culture.
Finally: Business Owners’ Performance
The final item to consider is your performance as a business owner. Not every owner has the time or desire to put such a process in place, but if you want your business to grow and have a healthy business environment I think it’s one of the best means to enhance the success of the business. Depending on the size of the business, the Owner Performance Review can be done by hiring an outside consultant. An alternative suggestion is to do it by an anonymous survey but this approach reduces the effectiveness as it restricts the answers that can be given and don’t allow an exchange to clarify things.
There is a business axiom that says “If you can’t measure it, you can’t manage it.” The Performance of a business can mean the difference between success and failure. Most businesses do not fail overnight. They decline gradually, with often the decline picking up steam towards the end. A good Performance Plan will provide warnings that if measured and managed will allow corrective action to be taken in time.