Performance Measurement

Performance Measurement: Your Business Report Card

The Story of Your Business Health

Imagine you have a lemonade stand. Every day, you sell lemonade and make money. But how do you know if your stand is doing really well or just okay?

You need a report card for your business! Just like school gives you grades to show how well you’re learning, businesses use special measurements to see how healthy they are.

Today, we’ll learn three magical measuring tools that businesses use:

1. Return on Investment (ROI) - Are we getting enough back for what we put in?
2. Residual Income - Are we making MORE than the minimum we should?
3. Balanced Scorecard - Are we doing well in ALL areas, not just money?

Part 1: Return on Investment (ROI)

What is ROI?

Think of ROI like planting a seed.

You plant one seed (your investment). Later, you harvest five apples (your return). That’s a great deal!

ROI tells you: For every dollar I spent, how much did I get back?

The Simple Formula

ROI = (Profit ÷ Investment) × 100

This gives you a percentage - like a grade!

A Real Example

The Lemonade Stand Story:

Little Sarah wants to start a lemonade stand.

• She invests $100 to buy:

  • Lemons: $30
  • Sugar: $20
  • Cups: $20
  • Stand rental: $30

• After one month, she made $150 in sales

• Her profit = $150 - $100 = $50

Let’s calculate her ROI:

ROI = ($50 ÷ $100) × 100 = 50%

Sarah got 50% return! For every dollar she put in, she got 50 cents back in profit. That’s like getting a B+ on her business report card!

Understanding ROI Numbers

Why ROI Matters

Imagine you have $100 and two choices:

Option A: Buy toys for your store → ROI = 30% Option B: Buy candy for your store → ROI = 15%

Which should you choose? Option A! It gives you more bang for your buck.

graph TD
    A["You Have $100"] --> B{Where to Invest?}
    B --> C["Toys: 30% ROI"]
    B --> D["Candy: 15% ROI"]
    C --> E["Winner! Choose Toys"]
    D --> F["Less Profitable"]

Part 2: Residual Income

What is Residual Income?

ROI is great, but it has a problem. Let me explain with a story.

Two Ice Cream Trucks:

• Truck A invested $1,000 and made $200 profit → ROI = 20%
• Truck B invested $10,000 and made $1,500 profit → ROI = 15%

Which is better? ROI says Truck A wins (20% > 15%).

But wait! Truck B made $1,500 in real money, while Truck A only made $200!

Residual Income fixes this problem. It asks: “After paying the minimum expected return, how much extra profit do we have?”

The Simple Formula

Residual Income = Profit - (Investment × Required Rate)

The “Required Rate” is like the minimum passing grade. It’s what you should earn.

A Real Example

Back to the Ice Cream Trucks:

Let’s say the required rate is 10% (the minimum acceptable return).

Truck A:

• Investment: $1,000
• Profit: $200
• Minimum expected: $1,000 × 10% = $100
• Residual Income = $200 - $100 = $100

Truck B:

• Investment: $10,000
• Profit: $1,500
• Minimum expected: $10,000 × 10% = $1,000
• Residual Income = $1,500 - $1,000 = $500

Truck B wins! It has $500 in residual income versus only $100.

Why Residual Income Matters

Residual Income shows the actual extra money you made above expectations.

graph TD
    A["Your Profit"] --> B{Compare to Minimum}
    B --> C["Higher than Minimum"]
    B --> D["Lower than Minimum"]
    C --> E["Positive Residual Income"]
    D --> F["Negative - Needs Work!"]

Part 3: The Balanced Scorecard

The Problem with Just Looking at Money

Imagine you only care about your lemonade stand’s money. You might:

• Use cheap, yucky lemons (saves money!)
• Be rude to customers (who cares, they still buy!)
• Never learn new recipes (waste of time!)

Soon, customers stop coming. Your stand fails. Oops!

Money alone doesn’t tell the whole story.

What is a Balanced Scorecard?

The Balanced Scorecard is like having four different report cards instead of one:

1. Financial - Are we making money?
2. Customer - Are our customers happy?
3. Internal Processes - Are we doing things well?
4. Learning & Growth - Are we getting better?

The Four Perspectives Explained

1. Financial Perspective

“Are we making enough money?”

This is what we already know - ROI, profits, costs.

Example measures:

• Sales revenue
• Profit margin
• ROI
• Cost reduction

2. Customer Perspective

“Do our customers love us?”

Happy customers = future success!

Example measures:

• Customer satisfaction scores
• Number of repeat customers
• Customer complaints
• Net Promoter Score (would they recommend us?)

3. Internal Process Perspective

“Are we doing our work efficiently?”

This is about HOW you run your business.

Example measures:

• How fast we serve customers
• How few mistakes we make
• Product quality scores
• Delivery times

4. Learning & Growth Perspective

“Are we improving and learning?”

This is about getting better for the future.

Example measures:

• Employee training hours
• New skills learned
• Innovation (new products created)
• Employee satisfaction

A Balanced Scorecard Example

Sarah’s Lemonade Stand Report Card:

Sarah is making money and customers are happy. But she’s spilling too many cups and not trying enough new recipes. The Balanced Scorecard helps her see the whole picture!

graph TD
    A["Balanced Scorecard"] --> B["Financial"]
    A --> C["Customer"]
    A --> D["Internal Process"]
    A --> E["Learning & Growth"]
    B --> F["Are we profitable?"]
    C --> G["Are customers happy?"]
    D --> H["Are we efficient?"]
    E --> I["Are we improving?"]

Why Balance Matters

Think of your body. You can’t just eat candy all day because it tastes good (like only focusing on short-term profits).

You need:

• Healthy food (long-term financial health)
• Exercise (efficient processes)
• Friends (happy customers)
• Learning new things (growth)

A balanced approach makes you strong and healthy!

Putting It All Together

The Three Tools Summary

When to Use Each Tool

Use ROI when:

• Comparing different investment choices
• You need a quick percentage to compare

Use Residual Income when:

• Comparing divisions of different sizes
• You want to see actual dollars earned above expectations

Use Balanced Scorecard when:

• You want the complete picture
• Long-term success matters more than short-term profit

The Big Picture

graph TD
    A["Performance Measurement"] --> B["ROI"]
    A --> C["Residual Income"]
    A --> D["Balanced Scorecard"]
    B --> E["% Return on Money"]
    C --> F["Extra $ Above Minimum"]
    D --> G["Complete Health Check"]
    G --> H["Financial"]
    G --> I["Customer"]
    G --> J["Process"]
    G --> K["Learning"]

Key Takeaways

ROI - The Percentage Score

• Shows what percentage you earned on your investment
• Great for comparing options
• Higher is better!

Residual Income - The Dollar Score

• Shows extra dollars earned above the minimum
• Better for comparing different-sized investments
• Positive = doing well, Negative = needs help

Balanced Scorecard - The Complete Report Card

• Four perspectives: Financial, Customer, Process, Learning
• Prevents focusing only on money
• Builds long-term success

Remember This Forever

Think of a tree:

• ROI = How much fruit compared to seeds you planted (percentage)
• Residual Income = Extra fruit beyond what you needed to survive (bonus fruit!)
• Balanced Scorecard = Checking roots, trunk, branches, AND fruit (whole tree health)

A smart gardener checks everything. A smart business owner uses all three tools!

You’re now ready to measure performance like a pro!