Key Performance Indicators (KPIs) – All You Need To Know

Key Performance Indicators or KPIs are the quantifiable measures that a company uses to track performance over time. KPIs measure or demonstrate how effectively the company achieves its strategic and operational goals. Some examples of KPIs are revenue improvement, cost reduction, customer satisfaction, and more.

Basically, they track the factors that are important for the success of an organization. They focus on the functions and business processes that the top management sees as crucial for achieving the objectives of a business.

Key Performance Indicators in Detail

A company uses key performance indicators or KPIs at multiple levels to track performance. For instance, a company can use KPIs to track the performance of the sales and also the performance of the employees.

One also uses KPIs to compare the performance of the companies within the same industry. However, KPIs may differ from companies within the same industry as different companies have different business priorities. For instance, for a public company, its stock price will likely be its key performance indicator, but for a private company, KPI could be new customers or extra revenue over the last quarter.

Even cut-throat rivals in an industry may focus on a different set of KPIs on the basis of their goals and strategies. Moreover, even within the same company, different people may give importance to different KPIs. For instance, a CEO may give more importance to profit, while the head of sales could view additional sales in the quarter as more crucial.

Furthermore, management measures each department on the basis of KPIs specific to that department. Like, the sales department will have a different set of KPIs than the production department.

Below examples will help make KPIs clearer:

  • A sales team’s KPIs will be new customers, average deal size, new revenue, total revenue, etc.
  • A customer support team will track average on-hold time and user feedback.
  • The HR department will track employee turnover, employee satisfaction level, etc.

Importance of KPIs

  • Reflects on how well a business is performing.
  • Help to make operational changes to address performance issues.
  • It helps keep employees focused on the tasks that are critical to achieving the company’s or department’s objective.
  • KPIs can also give early warnings on potential business issues.

How to Develop KPIs?

To develop key performance indicators, a company or an organization must follow the below steps;

Set Goals

A company must first clearly lay down its objectives and goals. These goals must include all aspects of a business, including sales, production, marketing, etc.

Track Changes

A business must regularly track the changes in business metrics within a specific time frame. This will help to develop better key performance indicators. Suppose if a business tracks that sales during December usually slow down, then it can come up with a KPI to focus on December sales only.

Identify Critical Success Factors (CSF)

After the goals are set, a company must find out the factors that would help it to achieve the objectives. A point to note is that the CSF must be measurable and specific. For instance, increasing revenue is a vague CSF when compared to setting a goal of increasing sales by $5 million during the third quarter. The latter CSF is clear on the target and the time frame.

Use CSFs to create KPIs

KPIs quantify the critical success factors and thus, help to measure performance. For instance, if the CSF is an aggressive media campaign, then the KPI could be the number of footfalls or number of website views.

Monitor KPIs

To ensure that KPIs remain relevant, business managers must continuously monitor the KPIs. If they feel a KPI is no longer relevant, they should either modify it or remove it.

How to Measure KPIs?

Usually, companies nowadays have systems and tools in place that automatically track the KPIs. These tools collect relevant data and create performance reports as well. This information is then made available to the top management in the form of charts and other data visualizations. This helps the management to get meaningful information and make decisions accordingly.

Qualities of a Good KPI

  • Measurable and quantifiable
  • It must directly relate to the nature of the business and to the goals and objectives that the company is trying to achieve.
Key Performance Indicators

Types of KPIs

Lagging and Leading Indicators

KPIs that measure the things that have already occurred –like quarterly profit and revenue growth – are called lagging indicators. On the other hand, KPIs that will tell about future developments – like sales bookings next year – are known as leading indicators.

Continue reading – Lagging and Leading Indicators

Quantitative and Qualitative Indicators

Quantitative indicators are the ones that anyone can easily quantify, like new clients. Qualitative indicators are abstract and open to interpretation, like measuring user experience. Finalizing KPIs to measure qualitative indicators is a difficult task and depends on an organization’s ability to identify a way to quantify that qualitative indicator. Like, a number of negative feedbacks can help quantify the bad user experience.

Financial and Non-Financial KPIs

KPIs that quantify financials like sales, revenue, profit, and more are known as Financial KPIs. And KPIs that do not relate to financials are non-Financial KPIs, like foot traffic, employee turnover, repeat customers, and more.

Read about other Non-financial Performance Measures.

On the Basis of Functional Standpoint

There can be several types of KPIs on the basis of the underlying function they measure. Like KPIs for marketing, finance, production, employees, customer satisfaction, etc.

Conclusion

Management must communicate the details of the KPIs to the employees at all levels. All employees must know the importance of KPIs and what they help track. Also, instead of having too many KPIs, management must focus on a small set of important KPIs. This saves time and resources and helps to focus on key areas.

And managers must evaluate KPIs from time to time to ensure they are relevant as per changing business needs and are in line with the company’s goals. If a KPI is found to be not so useful or outdated, it should either be modified or replaced.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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