Performance measurement definition

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What is Performance Measurement?

A performance measurement is a numeric outcome of an analysis that indicates how well an organization is achieving its objectives. These measurements can be used to examine the performance of all aspects of a business, including the accounting, engineering, finance, marketing, materials management, production, research, and sales departments.

Examples of Performance Measurements

Examples of performance measurements are as follows:

  • Tracking the ability of the accounting department to collect overdue accounts receivable

  • Tracking the speed with which the engineering department can design new products

  • Tracking the liquidity of funds administered by the finance department

  • Tracking the amount of inventory maintained by the materials management department

  • Tracking the amount of scrap produced in the production department

  • Tracking the ability of the sales staff to bring in new sales from existing customers

Reporting of Performance Measurements

Performance measurements are typically compiled into a summary sheet that is distributed to the management team on a regular basis. Any measures falling below a trend line or not meeting a predetermined standard will be subject to enhanced management attention. The more critical performance measurements may be distributed daily, so that managers can take immediate action to remediate problem areas.

Related AccountingTools Courses

Business Ratios Guidebook

Key Performance Indicators

The Interpretation of Financial Statements

Advantages of Using Performance Measurements

There are several advantages to using performance measurements, which are as follows:

  • Feedback loop. The ongoing creation and monitoring of performance measurements allows a business to give its employees an effective feedback loop on how their areas of responsibility are functioning.

  • Management emphasis. Having performance measurements informs employees about what measurements are of interest to management. This tends to focus their attention on improving these measurements.

  • Employee performance. Performance measurements can be included in the personal performance plans of employees, which can impact their compensation and chances of promotion.

Responsibility Center Reporting

Another form of performance measurement is the use of revenue centers, profit centers, and cost centers to report the results of business segments. A revenue center is responsible solely for the amount of revenue it generates, while a profit center is responsible for both the revenues it generates and the costs it incurs. A cost center is only responsible for the costs it incurs. Nearly all parts of a business can be broken down into one of these classifications. By breaking down a business into responsibility centers and assigning responsibility for the results of each one to a specific person, a firm can more easily control its expenditure and investment levels.