Key Performance Indicators are one of the most widely used methods for measuring and monitoring performance.
We cover how they can be applied to your situation and also feature a few KPI Examples to review and download.
What are Key Performance Indicators (KPIs)?
KPIs are a set of values which are used to measure the key “drivers” of a business’ performance. KPIs will usually comprise both financial & non-financial values and should be S.M.A.R.T (a term coined by the management theorist Peter Drucker);
Specific – a specific bounded area of interest
Measurable – able to be measured objectively, reliably and quantitatively
Attainable – able to be met given the business circumstances
Realistic – reasonable given the business’ resources
Time-bounded – a specific time period for achievement
- There’s a few key guidelines to help ensure your experience & use of KPIs is successful:
- KPIs should be aligned to the key drivers of performance of the business – in other words they must be relevant.
- Don’t have too many KPIs to measure and monitor – it’s better to have a smaller number to ensure accuracy and focus – 5 to 8 KPIs should be sufficient.
- KPIs need to be supported by robust, accurate and timely measurement and reporting processes.
- KPIs must be tailored to the type of business – performance drivers of a services business are very different to a manufacturing business for example.
- KPIs should address as many aspects of the business as possible – a common mistake is to focus solely on bottom line financial measures.
- It is often the trend in KPIs which gives the most valuable information rather than an absolute number.
KPIs do not tell the whole performance story as some aspects of performance cannot be readily expressed in qualitative terms (such as business culture or social & environmental initiatives). So its wise to not take KPIs as the complete measure of business success.
Financial KPIs focus of course on financial performance and are routinely measured and reported.
- Gross Profit or Sales Margin (Sales less Cost of Sales – $ and %)
- Net Profit (Sales less Cost of Sales less Expenses – $ and %)
- Ratios – Cost of Sales (Cost of Sales / Sales), Gross Profit margin (Gross Profit / Sales), Net Profit margin
- Trends –month-to-month movement in KPIs
- Sales KPIs focus on gross sales performance.
- Gross Sales ($ and %)
- Average sale value $
- Sales Pipeline – proposals, quotations, orders in progress etc
- Returns and refunds ($ and %)
Customer KPI Examples
- KPIs used to measure performance with customers.
- # of customers,
- Movement in customer numbers (# and %)
- Customer retention (# of customers lost / total customers)
- Lifetime customer value
- Customer satisfaction scores (eg Net Promoter Score)
Employee KPI Examples
- Employee / sales ratio (employee expense / gross sales)
- Staff satisfaction (measured via quantitative surveys)
- Staff turnover (leaving staff / total staff)
Product or process efficiency metrics
- Rate of production (# or volume of units / time)
- Rate of defects (#, % defects / Volume)
- Cycle times
For a more extensive list of KPI Examples, please download the full list here.
Using your KPIs
In addition to being widely used by inside management, KPIs have many other uses. When combined with infographics, KPIs can be a powerful reporting and communications tool.
Although not a statutory requirement, many enterprises include reporting of KPIs as part of “best practice” investor reporting (including in public company Annual Reports). This type of reporting can provide valuable insights into the enterprise which may not be evident from statutory disclosures.
KPIs can be used as the basis for dashboards to provide a focused “one-page” view of performance. Regular dashboard reports help the founder keep an effective finger on the pulse of the business.
Properly constructed KPIs are a powerful tool for understanding and monitoring performance and for that reason are used extensively within (probably) the majority of enterprises globally. If you need help with constructing & reporting on your KPIs, reach out to the seasoned team at Fullstack whom can help with outsourced CFO services.