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Performance Measurement – How Does Your Organization Stack Up?
By James G. Kennedy, CPA
Performance measurement, the process of quantifying financial and non-financial data, has long been a management tool used in public and private companies. Performance measurement allows management to convert its strategies into action plans in an effort to ensure ongoing success. The process begins with the development of the organization's mission. Management then assesses its position in the marketplace, the current operating environment and external factors that can impact the organization in the future. Once this has been accomplished, management identifies critical success factors which are then used to develop objectives for success. Strategies are then developed and communicated to employees. Finally, the organization's expectations are measured against actual performance.
Operating statistics such as gross margin, earnings before interest, taxes, depreciation and amortization (EBITDA), net income and net cash flow are often used as performance measures by public and private businesses. Activity ratios, such as inventory and accounts receivable turnover, and liquidity ratios, such as debt service coverage ratio, are additional measures used to measure business performance.
In the not-for-profit sector, performance measurement is just as critical. Many not-for-profits receive federal and/or state funding. Future government funding is often dependent on demonstrating an ability to achieve certain performance measures such as number of patients treated or number of people placed in the workforce after training. A donor who makes a restricted contribution to a not-for-profit often requests performance measurement once the organization expends the contribution. Failure to meet the donor's expected performance can threaten continued support.
Many not-for-profits do not rely on government funding or significant donations for support. Performance measurement, however, is still critical to these organizations' ability to continue as a going concern. An organization that does not measure performance risks having a short shelf life.
Performance measurement processes have many benefits for not-for-profits including the following:
- Communicating the mission of the organization to its employees.
- Building consensus on the mission.
- Providing goals that are objective and measurable.
- Aligning individual employee goals with those of the organization.
- Linking the mission to the organization's annual goals and budgets.
- Providing information on performance to management and others within the organization.
How does your organization stack up?
If you would like more information on performance measurement, please call Jim Kennedy at 617-426-9440.
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