What are KPIs and Their Usage?Sep 27, 2022
Most large companies are successful because they keep tabs on their growth and ensure they remain on track to achieve their strategic goals.
As a business owner, you need a tool for measuring your business performance and growth if you are to meet your expectations. This is where KPIs come in.
We have written this article for anyone looking to learn about KPIs. You will learn about the different types of KPIs, their advantages, and how to use them to achieve your strategic objectives.
What Is a KPI?
KPI stands for a key performance indicator. Key performance indicators are metrics that show how well a business is achieving essential objectives.
In other words, KPIs help businesses measure performance or progress in key areas and then make well-informed decisions. They require the collection, analysis, and storage of data.
A key performance indicator KPI can be used to measure progress at different levels in an organization. Depending on your goals, you can use them to track the performance of a company, team, department, individual, or machine.
For instance, your key performance indicator can be the number of new customers you have monthly or the number of products you produce. By keeping tabs on such data, you will know when there is a drop or increase in performance and then make a quick, data-driven decision.
Types of Key Performance Indicators KPIs
You can choose between four major types of KPIs. Though they all have a common goal, they have different attributes.
Strategic KPIs provide a high-level snapshot of an organization's performance. They don't offer detailed information. Executives use them to keep tabs on their organizational goals. Good examples of strategic KPIs are ROIs, market share, earnings, and profit margin.
You can use operational KPIs to measure your company's performance over a short period. Managing staff usually uses them to monitor organizational processes and efficiencies. How fast are you making sales? How are your product lines performing?
A functional KPI can be strategic or operational. You can use functional KPIs to focus on a particular department or function. For instance, the IT can monitor their average uptime while the finance team can focus on return on assets.
Leading and Lagging Indicators
Leading indicators predict future performance while lagging indicators focus on past performance. Let's use your cash flow as an example. Your expenditure will be regarded as a lagging indicator since it's a past event, while your invoice will be a leading indicator because it is money you are yet to receive.
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Key Performance Indicators KPI Examples
Here is a breakdown of four examples of KPIs you should know:
Financial KPIs focus on the financial situation or progress of a business by looking at its revenue, cash flow, etc. You can derive from your financial statements.
For instance, you can monitor your company's overall debt level if it's in a dire financial situation. Examples of financial KPIs include net profit margin, operating profit margin, gross profit margin, working capital ratio, customer lifetime value, etc.
Customer KPIs monitor customers. They let you know how your customers feel about your product or service by tracking things such as customer satisfaction and retention. Examples of customer KPIs are the number of customers, average response time, average resolution time, customer satisfaction rating, and more.
You can keep tabs on your company's operational performance with process performance KPIs. They will tell you how your business runs and help you detect problems.
Process KPIs are mostly used by manufacturers and other companies with repetitive processes. Examples of these KPIs include the percentage of product defects, quality rate, and production efficiency.
Marketing KPIs can help you monitor your marketing campaigns. They will help you see the effectiveness of your marketing team and strategies. Examples of marketing KPIs include website traffic, clickthrough rate, social media engagement, etc.
Employee-specific metrics monitor employees in different ways. You can use them to keep tabs on employee satisfaction, performance, health, retention, etc. Examples of staffing KPIs are employee turnover rate, absenteeism rate, employee satisfaction, and amount of overtime.
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How To Set KPIs
Choosing the right key performance indicators can be complicated due to the wealth of data available to companies today. As a result, you must be selective and only opt for KPIs essential to your business. Follow these steps to set effective KPIs:
Tie Them To Your Strategic Objectives
The first step you should take when developing a KPI is to ensure that it matches your strategic goals. You may want to return to your business plan for this. You discuss your plans for the KPI report with your business partners to identify where your focus should be.
Create SMART KPIs
For a KPI to be effective, it must be in line with the SMART formula. Your KPI needs to be specific, measurable, achievable, realistic, and time-bound. You will be wasting resources if your KPI doesn't meet these requirements.
State the Parameters
The final step in the development of KPIs is to define the parameters. You should have a minimum number you expect to hit for each one. For instance, you can set the total number of system downtime to 15 when dealing with IT KPIs.
One thing you should know about tracking KPIs is that it has to be done regularly. If not, your efforts will be wasted.
Some companies use accounting software that features KPI dashboards or similar software for streamlined data collection. Such software will allow you to update and track KPIs seamlessly.
However, you can opt for a basic spreadsheet or database if you have a limited budget or just want to keep things simple. Remember to alter your KPIs as your business grows and your objective changes.
Additionally, you should try to trace and solve problems when you fail to hit your targets. If you change your KPIs instead, you will be avoiding your problems.
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Benefits of Using KPIs
Whether you run a solo business or work with employees, you can enjoy several benefits from using KPIs. We have listed some of them below:
- Helps you monitor the health of your business
- It keeps your teams aligned
- It enables you to detect strengths and weaknesses
- It serves as a link between your business objectives and operations
- It can help you track your team's performance
The long-term success of your business depends on how well you can track progress and performance. This makes KPIs an essential tool for all businesses. We have covered everything you need to know about key performance indicators in this article. So, we expect to now know how to use them.
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Frequently Asked Questions
What does KPI stand for?
KPI stands for key performance indicators.
What is a good KPI?
A good KPI will provide you with a clear idea of your progress toward your business objective and help you make an informed decision.
What are the 4 main KPIs?
Every business is different. However, the 4 main KPIs you should know are customer satisfaction, internal process quality, customer satisfaction, and financial performance index.
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