Running a business means dealing with challenges. Some you can control. Some you can’t, but you can react in a way that keeps you in business.
If you want your business to succeed, you need to know the internal and external factors that influence its performance. Knowing these factors puts you in a better position to handle them. It also lets you plan ahead and prevent a factor from putting you out of business.
This post looks at the key factors affecting business performance. We’ll start with those in your direct control (internal factors), then move to those outside your control (external factors).
Business Performance Definition
Business performance refers to how well or how poorly a business progresses toward its goals and objectives. It’s a way to monitor and evaluate how an entity is doing at a given time or over its entire lifespan. Measuring business performance lets you assess your overall health, especially compared to a similar business or your own past performance.
You can measure business performance with quantitative and qualitative indicators, known as key performance indicators (KPIs). There are many to choose from, so pick the ones that match your goals.
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). Most small businesses only need to track four to six KPIs at a time, spanning efficiency, growth, health, and resilience — tracking everything at once makes it harder to see what’s actually driving results.
Quantitative indicators are measured with numbers. Examples include the number of sales, customer acquisition cost, customer lifetime value, and cash flow analysis. Qualitative indicators aren’t measured with numbers — they focus on opinions and experiences. The most common examples are surveys and interviews.
Key Points and Facts About Factors Affecting Business Performance
- Business performance is shaped by two kinds of factors: internal (inside the entity) and external (outside it).
- Internal factors map to the strengths and weaknesses in a SWOT analysis. External factors map to the opportunities and threats.
- You have direct control over internal factors and can act to improve them.
- You don’t control external factors, but you can prepare for them and adjust your response.
- The six external “spheres” covered here — economic, political, competitive, technological, social, and environmental — closely mirror the widely used PESTLE framework (political, economic, social, technological, legal, and environmental).
- Most small businesses do best tracking four to six KPIs at a time rather than monitoring everything.
Here Are the Factors Affecting Business Performance
Many forces affect business performance. Some happen inside the entity, others outside it. Together, these are known as the business environment, and understanding it is part of your job as an owner or manager.
Strive to know everything happening around your business. Doing so helps you spot your strengths and weaknesses from internal factors, and your opportunities and threats from external ones, so you can build on what’s working and adjust what isn’t.
There are two types of factors that influence business performance: internal and external. Let’s compare the two.
Internal Versus External Factors Affecting Business Performance
Internal factors are the things that affect your business from within the entity. These are within your direct control, meaning you can prevent and influence their occurrence.
Internal factors fall under the strengths and weaknesses sections of a SWOT analysis. If an internal factor helps your business perform, it’s a strength. If it holds your business back, it’s a weakness.
External factors, by contrast, influence your business’s performance from the outside. You have no direct control over them, but you can react by adjusting so they don’t hit your business too hard.
External factors fall under the opportunities and threats sections of a SWOT analysis. An opportunity is an external factor that helps business performance. A threat is one that can hurt it.
Seven Internal Factors Affecting Business Performance
Let’s discuss the internal factors. Remember, these are within your control, and their influence comes from inside the entity.
1. Operational Efficiency
Operational efficiency covers all the activities happening inside the business, from procurement to warehousing to production to logistics. It’s every process that leads to the final product and helps the entity reach 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.
Analyze your procedures to cut process failures and waste. Try to allocate resources efficiently — for example, avoid hiring more staff or using more equipment than operations need.
Making your operations as efficient as possible reduces production costs. It also helps you meet deadlines and produce the right quantities for demand.
2. Financial Resources
Financial resources are the funds you need to operate your business and invest in new opportunities. This internal factor covers your working capital, cash flow, revenue, sources of income, and investment opportunities.
A lack of financial resources affects your ability to pay operating costs and expenses. That, in turn, hinders your business performance, since you may not be able to produce as much as you intended.
Overspending and mismanaging financial resources can also hurt your operations. You may run out of cash to fund your business, stalling operations. Manage your financial resources carefully so your business stays financially stable.
3. Management
Executives and managers play a major role in any entity. They set the decisions and strategies to reach the business’s goals, and they shape the company’s culture and drive teams to get work done. Managers have a direct influence on how employees perform.
Bad managers can create a toxic work environment where employees feel demotivated. Good managers keep employees motivated and engaged, which makes them more productive. This is why hiring the right managers and executives matters.
4. Infrastructure
Beyond efficient operations and good management, make sure you have suitable infrastructure for your functions. High-quality, fully functional infrastructure helps your employees perform their tasks quickly and efficiently.
For example, a stable internet connection makes it easier for staff to communicate. Fully serviced delivery trucks mean your logistics team worries less about breakdowns, and customers get their deliveries on time.
5. Organizational Culture
Organizational culture is how employees perform tasks and interact within the organization — their shared values, beliefs, and practices in the workplace. One organization might center everything on the customer. Another might put employees over process.
As the business owner, develop a strong, intentional, and unified culture. Don’t let your company culture evolve on its own, or you may end up with different cultures in different departments and branches — which can lead to conflicts that hurt performance and morale.
6. Human Resources
Your employees are either an asset or a liability, depending on their skill sets, work ethic, and attitude toward work — a strength or a weakness in the organization. How they perform tasks and interact with each other affects business performance, which is why you need to recruit people committed to their roles and compatible with your culture.
7. Innovation
Innovation is the process of introducing a new way of doing things. Successful innovation helps teams become more productive and makes processes more efficient. It can also reduce operating costs and increase turnover and production.
Six External Factors Affecting Business Performance
Now let’s cover the external factors, grouped into six spheres for easy recall. If you’ve come across PESTLE analysis, this covers similar ground — political, economic, social, technological, legal, and environmental factors — organized here a little differently. Even though you don’t control these factors, you can still set up measures to spot and reduce their impact on your business.
1. Economic Sphere
The economic sphere covers changes that arise from the economy — inflation, interest rate changes, and similar forces. Inflation alters demand and supply for your product or service. A rise in interest rates reduces a business’s ability to get loans, and higher taxes lower an entity’s profits.
A good, stable economy favors businesses. A weak one can hurt even a strong, capably run business. Here are the contributing factors:
- Tax rates — When tax rates rise, businesses pay more taxes and keep less profit.
- Exchange rates — A rise in exchange rates affects businesses sourcing goods overseas, since they pay more for supplies.
- Interest rates — Higher interest rates mean businesses and individuals borrow less, and thus invest and buy less.
- Economic booms and recessions — Consumers buy less in a recession, so most businesses make less revenue and profit.
- Inflation — Inflation raises prices, reducing demand for products and services, especially luxury goods.
2. Political Sphere
The political sphere covers factors that arise from government decisions and policies. This can affect business performance in many ways, depending on the specific factor.
For example, a new law raising the national minimum wage would reduce a company’s profit through higher wages. The government can also require companies to run regular safety training. Contributing factors in this sphere include:
- Tariffs and sanctions
- Import restrictions
- Taxation
- Employment laws and regulations
3. Competitive Sphere
Competition can help and hurt business performance. On the positive side, it pushes businesses to innovate and stay sharp, and it can lead to better customer service.
On the downside, competition shrinks market share and reduces demand per business, since customers have more options. To stay competitive, a company may need to lower prices or offer promotions and discounts.
4. Technological Sphere
Technology has been changing the way businesses operate for a long time. It has led to the rise of new entities and the decline of others. Staying open to new technology gives your company a better chance of keeping pace with the market.
Technology can improve your processes and operations when you embrace it. It can also reduce demand for your product or service if you fall behind. Factors in this sphere include:
- Automation
- E-commerce
- Research and development
- Information technology
5. Social Sphere
The social sphere covers customer preferences and spending habits — demographics, social trends, lifestyles, and tastes.
Customer preferences change over time, shifting demand with them. Keep tabs on what your customers want so you can consistently meet their needs and expectations.
6. Environmental Sphere
The environmental sphere covers factors that occur naturally — weather changes, storms, earthquakes. Most of these are predictable but not controllable. You can’t stop an earthquake or a storm, but you can prepare with insurance or an emergency fund. Examples include:
- Weather changes
- Climate changes
- Natural disasters
- Pollution
Action Steps for Managing Factors Affecting Business Performance
Review Your Internal Factors
- Walk through operations, finances, management, infrastructure, culture, staffing, and innovation, and note where each one is helping or holding you back.
- For each weakness, write down one change you could make this quarter.
Scan Your External Environment
- Look at the economic, political, competitive, technological, social, and environmental forces most likely to affect your industry right now.
- Sort what you find into opportunities to act on and threats to prepare for.
Choose a Small Set of KPIs
- Pick four to six indicators tied to what you’re trying to achieve this year, instead of tracking everything at once.
- Set a regular date to review them so you catch problems while they’re still small.
Checklist for Assessing Factors Affecting Business Performance
- List your internal factors — operations, finances, management, infrastructure, culture, staffing, innovation.
- Mark each internal factor — strength or weakness.
- List your external factors — economic, political, competitive, technological, social, environmental.
- Mark each external factor — opportunity or threat.
- Pick four to six KPIs — tied to your current goals.
- Set one action per weakness or threat — with a date to revisit it.
FAQ: Factors Affecting Business Performance
What’s the difference between internal and external factors?
- Internal factors come from inside the business and are within your control, like management and finances. External factors come from outside the business and are outside your control, like the economy and competition.
How does SWOT analysis relate to these factors?
- Internal factors show up as strengths and weaknesses in a SWOT analysis. External factors show up as opportunities and threats.
How many KPIs should a small business track?
- Most small businesses do best tracking four to six KPIs at a time, spanning efficiency, growth, health, and resilience.
Can a business influence external factors at all?
- Not directly, but a business can prepare for them and adjust its response — for example, building cash reserves ahead of a downturn or adopting new technology to stay competitive.
Conclusion
No business operates in a vacuum. Many factors, inside and outside your control, can help or hurt your growth and performance. How you react to them determines whether your business succeeds or struggles.
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