Factors Affecting Business Performance
It’s no secret that running a business exposes you to many challenges. The journey is never a smooth ride. This is because there are so many factors that may affect the performance of your business. Some, you can control. Some you can’t, but you can react to them in a way that enables you to remain in business.
If you want your business to become successful, you need to know the internal and external factors that influence its performance. Doing so puts you in a better position to handle that particular factor or situation. In addition, it allows you to create plans and strategies for dealing with and preventing the factor from putting you out of business.
This post will look at the key factors affecting business performance. We will start with those in your direct control (internal factors) and then move to those outside your locus of control (external factors).
Business Performance Definition
Business performance refers to how well or how poorly a business progresses towards achieving its goals and objectives. It is a metric used to monitor and evaluate how an entity is doing at a particular time or in its entire lifespan. Measuring business performance enables an entity to assess its overall health and success, especially when compared to another similar business or its past performance.
You can measure the performance of a business using both quantitative and qualitative key performance indicators (KPIs). KPIs are metrics for measuring business performance. There are many KPIs that you can use to evaluate your business.
For example, when measuring profitability, you can use sales revenue, net profit margin, return on sales, and gross profits. To evaluate customer satisfaction, use indicators like customer surveys, customer retention rate, and Net Promoter Score (NPS).
Quantitative indicators are measured using quantifiable data, or in other words, numbers. Examples include the number of sales, customer acquisition cost, and cash flow analysis. Qualitative indicators, by contrast, are not measured with numbers. Instead, they focus more on opinions and experiences. The most common examples are surveys and interviews.
Here Are the Factors Affecting Business Performance
As highlighted above, many forces and factors affect business performance. Some happen inside the entity, while others occur on the outside. These forces and factors are collectively known as the business environment. As the business owner or manager, you need to understand your business environment.
Strive to know everything happening around your business. Doing so will enable you to understand your strengths and weaknesses (based on the internal factors) and identify your opportunities and threats (from the external factors.) Afterward, you can build on your strengths and minimize your weaknesses. You can also take advantage of opportunities and find ways to curb threats affecting your business.
There are two types of factors that influence business performance. They are internal factors and external factors. Let’s compare and contrast the two.
Internal Versus External Factors Affecting Business Performance
Internal factors refer to the things that affect your business performance from within the entity. These factors are within your direct control, meaning that you can prevent and influence their occurrence.
Internal factors fall under the strengths and weaknesses sections of the SWOT analysis. If an internal factor promotes business performance, it is considered a strength. If it prevents business growth and development, then it is a weakness.
External factors, by contrast, are the things that influence your business’s performance from the outside. You have no direct control over these factors. You can, however, react to them by making adjustments to ensure they don’t hit your business too hard.
External factors fall under the opportunities and threats sections of the SWOT analysis. An opportunity is an external factor that promotes business development and performance. A threat is an external factor that can affect business performance negatively.
Seven Internal Factors Affecting Business Performance
Let’s now discuss the internal factors affecting business performance. Remember that these factors are within your locus of control, and their influence comes from inside the entity.
1. Operational Efficiency
Operational efficiency encompasses all the activities happening inside the business, from procurement to warehousing and storage to production to logistics. It involves all the processes and procedures that lead to the final product and help the entity achieve its goals.
Operational efficiency has a direct impact on your business’s performance. The better your operational efficiency, the greater your production and the higher your profitability.
Strive to ensure all operations in your business run as efficiently as possible. Analyze your procedures to minimize process failures and wastages. Try to allocate resources more efficiently. For example, avoid hiring more staff or using more equipment than you need in operations.
Making your operations as efficient as possible will enable you to reduce production costs. It will also allow you to meet production deadlines and produce the right quantities as per demand.
2. Financial Resources
Financial resources are the funds you need to operate your business and invest in new opportunities. This internal factor encompasses your working capital, cash flow, revenue, sources of income, and investment opportunities.
A lack of financial resources affects your ability to pay operations costs and expenses. It, in turn, hinders your business performance since you may not be able to produce as many products as you initially intended.
Overspending and mismanagement of financial resources may also affect your operations negatively. You may run out of cash to fund your business, causing your operations to stagnate. Always ensure you have enough financial resources and manage them effectively so that your business remains financially healthy.
Executives and managers play a significant role in any entity. They are the ones who come up with decisions and strategies to achieve the business’ goals. They are also the ones who shape the company’s culture and drive teams to accomplish their tasks. Managers have a direct influence on how employees perform. How they treat and manage their teams may impact business results and performance.
Bad managers may create a toxic work environment where employees feel demotivated, negatively affecting their performance. Good managers, by contrast, are good at keeping employees motivated and engaged, which makes them more productive. This is why you need to hire the right managers and executives to run your business.
Besides having an efficient operations system and good management, ensure you have the suitable infrastructure for your functions. A high-quality and fully-functional infrastructure ensures your employees perform their tasks quickly and efficiently.
For example, if you have a stable internet connection, your staff members will have an easier time communicating. If your delivery trucks are fully serviced, your logistics team won’t worry about constant breakdowns. Your customers will also get their deliveries on time.
5. Organizational Culture
Organizational culture encompasses how employees perform tasks and interact within the organization. It also entails their shared values, beliefs, and practices in the workplace. For example, one organization may have a culture of customer-centrism in everything they do. Another may have an organizational culture of putting employees over processes.
As the business owner, ensure you develop a strong, intentional, and unified organizational culture in your company. Don’t let your company culture evolve on its own. You may end up with varying cultures in different departments and branches. This may lead to conflicts in the workplace, which affect employee performance and morale.
6. Human Resources
Your employees are either an asset or a liability, depending on their skill sets, work ethics, and attitudes towards work. They are either a strength or weakness in the organization. The way they perform tasks and interact with each other can affect business performance. This is why you need to recruit employees committed to their roles and responsibilities. They should also be compatible with your organization’s culture.
Innovation is the process of introducing a new way of doing things. Successful innovation helps teams become more productive and make processes more efficient. It may also reduce operational costs and increase turnover and production. This internal factor impacts business performance positively.
Six External Factors Affecting Business Performance
Let’s now delve into external factors that influence business performance. We will categorize them into six spheres for easy recollection. Even though these factors are not within your control, it doesn’t mean you can’t do anything about them. On the contrary, you can set up measures to identify and reduce their impact on your business.
1. Economic Sphere
The economic sphere comprises changes or forces that arise from the economy, for example, inflation and a rise in interest rates. The economy affects businesses in multiple ways depending on the contributing factors. For instance, inflation alters the demand and supply of your product or service. Likewise, a rise in interest rates reduces a business’s ability to acquire loans, and an increase in taxation lowers an entity’s profits.
The economy has a profound effect on business performance. A good and stable economy is favorable for businesses. A bad one, by contrast, can cause the demise of even a well-managed entity. Here are the contributing factors in the economic sphere:
- Tax rates
When tax rates increase, businesses pay more taxes and make less profit.
- Exchange rates
A rise in exchange rates affects businesses that source goods from overseas as they pay more to buy supplies.
- Interest rates
A rise in interest rates causes businesses and individuals to borrow less, and thus they invest and buy less.
- Economic booms and recessions.
Consumers buy less when there is a recession, causing most businesses to make less revenue and profit.
Inflation causes a rise in prices, reducing the demand for products and services, especially luxury goods.
2. Political Sphere
The political sphere encompasses factors that arise from decisions and policies the government passes. This external factor may impact business performance in many ways. But again, it depends on the contributing factor.
For example, the government may pass a new law that raises the national minimum wage. Such a law may reduce a company’s profit since it will have to pay more wages. The government can also introduce a new policy requiring companies to conduct regular safety training.
Here are a few external factors that fall in the political sphere:
- Tariffs and sanctions
- Import restrictions
- Employment laws and regulations
3. Competitive Sphere
Competition can have both positive and negative impacts on business performance. On the bright side, it helps make businesses more innovative and less complacent. It can also lead to better customer service.
The downside, however, is that competition decreases market share. In addition, it causes a reduction in demand per business since the customer has plenty of options. Therefore, to remain competitive, a company may have to lower its prices or offer promotions and discounts.
4. Technological Sphere
Technology has been changing the way we conduct business since the days of yore. It has led to the emergence of new entities and the demise of others. Strive to make technology your best friend to ensure your company always stays ahead of the curve.
Technology also impacts businesses in many ways. It can improve processes and operations if you embrace it. It can also reduce the demand for your product or service if you go against it. The factors that fall into the technology sphere include:
- Research and development
- Information technology
5. Social Sphere
The social sphere encompasses the preferences and spending habits of customers. This sphere covers demographics, social trends, lifestyles, and tastes.
Customer preferences change over time, and with this change comes a shift in demand. So strive to know what your customers want to consistently meet their needs and expectations.
6. Environmental Sphere
The environmental sphere is for factors occurring naturally, for example, weather changes, tsunamis, and earthquakes. Most external factors in this sphere are predictable, but they are not controllable. You can’t prevent an earthquake or a storm from occurring and destroying your business. The best that you can do is prepare for it by taking an insurance cover or having a disaster emergency fund. Examples of factors in the environmental sphere are:
- Weather changes
- Climate changes
- Natural disasters
No business operates in a vacuum. Many factors can contribute to or hinder the growth and performance of your entity. How you react to these factors determines whether your business will succeed or fail.
There are two types of factors that can affect business performance. The first is internal factors that are controllable and more manageable. These factors are, in other words, the strengths and weaknesses of a business.
The second type is external factors which are uncontrollable and harder to manage. Think of them as opportunities and threats to your business. You can’t prevent these factors from occurring, but you can respond in a way to minimize their impact on your business.
In this section, you’ll find a unique collection of resources related to improving the performance of a business. Many of them lead to google search results, and that’s by design to ensure you receive the most recent and popular results every time you visit.
Business Performance Metrics
There are key metrics that will help you identify how your business is doing. This topic is beyond the scope of this article, but it’s an area to look into. Because if you don’t measure performance, you won’t be able to tell if your business is improving, stable, or declining.
The link below offers the latest information related to performance tracking.
Performance Management Software
Software for business performance management is a must. It will save you time and a lot of the grunt work. So take advantage of the software available to help you organize and accurately track your business performance.
When you find a software package that appeals to you, I highly recommend you do your research on it before implementing it. You may want to check out reviews to see what others have experienced. It’s also a good idea to request a demo to try out the software and ensure it’s a good fit.
Reading books on improving business performance is another way to expand your knowledge. There are many publications out there. I suggest browsing through the table of contents, index, blurb, and introduction to get an overview of what the book offers.
Below are two links one leads to Google search results for books on improving business performance, and the other one leads to books available on the topic from Amazon.
Courses are another excellent source of learning. For example, you may want to consider a course where you can learn online and at your own pace. Or you may prefer to attend a class where an instructor is present.
You can research any course you’re interested in to ensure it’s a good fit. You can also research the author to check on their credentials.
Another point worth mentioning is some courses offer certification while many online courses do not. In my view, it’s a bonus to be certified but not necessary if your main goal may be to improve operations in your company.
Performing a Google News search often provides stories covered by the media that contain valuable information and a fresh perspective. When the topic is covered by the media proves it’s newsworthy.
It’s worth noting that the Google news search results contain the latest stories and archived ones. Keep scrolling to view archived news stories.
YouTube is an excellent source of information, especially for visual learners. You can usually tell if a video is worth watching in the first minute or so, and if you like the video, you can add it to your favorites when you are logged in.
Another point is that you’ll see a list of related topics when watching a video. I like this feature because it broadens my understanding of the topic, and I’m always looking for those videos.