How do you know if your business is on the right track? Key performance indicators, or KPIs, are one way to find out, as they can be used as a management tool to set targets and track performance. Take a closer look at how it works.
KPI meaning: what are key performance indicators?
The KPI meaning in business refers to quantifiable metrics. Essentially, they are used to measure a company’s performance over time. Key performance indicator examples can include everything from net profits to employee retention rates. The KPI meaning often relates to how the business measures up against competitors in the same sector, offering a quantifiable tool for comparison.
Key performance indicators cover a lot of territory, and their specific makeup will depend on the industry and your company’s business goals. However, these measurements usually relate to the company’s financial, operational, and strategic goals. For example, a tech start-up focusing on swift growth might use year-over-year revenue growth as its key performance indicator. On the other hand, a retail business might focus on foot traffic as its chief KPI metric.
Financial key performance indicators
A KPI meaning in business is frequently tied to financial strategy. One key performance indicator example is net profit, a measurement that weighs a business’s overall revenue for a given period, accounting for taxes, interest, and other expenses. To use net profit as a KPI, it’s converted into a percentage of revenue called the net profit margin. This allows it to be used in a comparative analysis.
Similarly, gross profit margin is a frequently used KPI. This measures revenue after subtracting expenses directly related to production. In both these cases, a new business could look at the industry’s standard margins. For example, the average net profit margin in their industry might be 60%. The company would then know that it must meet or beat that percentage to be viable in the market.
Current ratio is another financial key performance indicator, focusing on a company’s liquidity. To calculate the current ratio, a company’s current assets are divided by its debts. While it’s often recommended that a company have enough cash to meet financial obligations for a standard 12-month period, using this figure as a KPI requires inter-industry comparison. As long as cash flow is equal to or better than its peers, the company is financially viable.
Non-financial key performance indicators
There are many metrics of performance that aren’t necessarily tied to hard, financial data. Aside from liquidity and profit, a company’s viability and growth can be measured with several non-financial KPIs.
Non-financial key performance indicator examples include quality metrics, such as customer experience. It can also use easily quantifiable numbers like new customer growth and employee turnover rates.
Project measures track a specific project’s progress, such as deadline delivery and target reach. Operational indicators focus on a business’s daily product development and internal operations, while risk indicators focus on the factors that could threaten success.
How to use KPIs effectively
Key performance indicators are used as navigation tools for a company’s stakeholders, giving insight into whether the business is on the right path. Using financial and non-financial KPIs, progress can be measured in real-time, which is vital for companies who must adapt to constantly shifting market conditions.
KPIs are also used to make important business decisions, justifying them to stakeholders with quantifiable data. The most effective measures of company health pertain to its overarching goals or strategies. In addition to setting targets, you can track your progress working with leading and lagging indicators:
Leading indicators are used to measure future success
Lagging indicators are used to measure past results
By using a blend of financial and non-financial KPIs together with concrete goals, businesses can best track their success over time.
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