Key performance indicators such as financial ratios and pay for performance are a good way to assess overall and individual performance of an individual in the organization. The basic KPIs used by family owned businesses could be:
Financial ratios, these are good indicators of how well the business is doing financially. This is because the biggest risk in a family business is the mismanagement if finances and useless spending by family members on their personal affairs. Measures such as sound financial reporting and analysis can allow the organization to keep a check and balance on the performance of both the company and the individuals working within it.
Pay for performance is also another way to measure good business performance in a family business. Individuals in a family business are driven towards making the company successful and have a thirst to prove their worth. If the company works according to the rules that are applied to all employees and not just family members, pay for performance can be a good indicator of business performance.
The biggest risks apart from financial drain are rivalry among family members over ownership and capital, nepotism and favoritism and sibling rivalry after succession. To avoid this, proper succession planning should be in place so that even after the demise of the first generation, the business performs well enough to go to the second generation.
Family governance involves the family to regularly meet and discuss where the company is headed and devise long term strategies. It involves the members who are on the B.O.D to meet with the members of both family and management to discuss how the organization is performing under the set values of the family. Like mentioned, most family businesses tend to involve themselves more in philanthropy due to the values it holds There are three components of family governance.
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