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5 key characteristics of performance metrics

In this article, we'll explore performance metrics, the 5 characteristics they should have, and how they can be presented.

In this article, we’ll go through the key characteristics of performance metrics and see how they can be presented.

Five characteristics of performance metrics

Performance metrics should include the following five characteristics:

  1. Aligned to strategy
  2. Transparent
  3. Contextualised
  4. Reliable
  5. Consistent

1. Aligned to strategy

What do investors want? They want to see performance metrics that provide accurate insight into the company’s strategy and sources of long-term value. Organisations can present how their metrics are aligned to strategy by providing a combination of performance metrics that are linked to strategic objectives, competitive advantage, and business models (which incorporate KPIs), as well as operational metrics.

2. Transparent

A performance metric should be meaningful to add value to decision-making. Meaning, and so transparency, is derived from the ability to understand what the metric actually attempts to measure. Transparency builds credibility, increases understanding, but it also enables investors to reasonably accept or reject metrics in order to assess organisational performance.

It’s important to note that financial accounting standards such as IFRS, GAAP and IAS require disclosures.

3. Contextualised

When engaging with performance metrics, investors want to understand what has been or would be achieved in the context of company aims. You can contextualise performance metrics by:

  • disclosing targets for performance metrics by indicating whether actual performance is aligned to targets
  • referencing to industry benchmarks (where relevant)
  • linking to a market context to indicate how it impacts the company.

4. Reliable

Performance metrics should be calculated accurately by following the accounting principles and corporate governance frameworks. Companies can depict the reliability of performance metrics by:

  • making the governance and oversight metrics clear
  • explaining the levels of scrutiny to which metrics have been subjected to
  • distinguishing between internal information and third-party information.

5. Consistent

Consistent reporting across time and reporting formats ensures credibility and increases the confidence of investors. Investors favour standardised performance metrics over loosely defined ones.

To satisfy this need, companies can exhibit consistency by:

  • explaining performance metrics in reference to industry benchmarks
  • focusing on a five-year track record
  • depicting consistent information across reporting formats.

Presenting performance metrics

Performance metrics can be presented using the following modes and methods:

  • Financial reports
  • Presentations
  • Charts and graphs
  • Dashboards

If you’d like to learn more about performance metrics, and data-driven decision-making, check out the full online course, from FutureLearn, below.

This article is from the free online

Financial Analysis for Business Performance: Data-Driven Decision Making

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