When assessing the degree of success achieved by a business in a particular time period, it is imperative to evaluate specific and defined measurements. Key Performance Indicators (KPIs) analyze particular business activities and allow management to determine which course of action to take in order to either sustain current performance or surpass it. These factors reveal if progress is being made toward previously established goals and can trigger other activities to help spur organic growth. Selecting the appropriate KPIs is reliant upon a thorough understanding of an organization and the industry. Although each company’s measurements will differ, there are some standard KPIs that can reveal much about a firm’s internal and external structure.
Contrasting goals
Across different departments and industries, companies possess differing strategic/operational goals and therefore contrasting KPIs. A large corporation will have specific KPIs relating to each component of the company, whereas smaller firms may have a narrower scope that ignores other performance metrics. For example, a school might consider the number of students that drop out or fail to be a KPI, a sporting league might want to review trends in merchandising sales, and a movie theatre may want to evaluate concession sales.
Every company has a unique set of values that help determine exactly how it plans to succeed. The first step in measuring a company’s performance is addressing which of these values are the most pivotal to success. Most performance indicators are quantifiable and can provide personnel with key insight regarding the stability of their financial model. Other measures may be based on quality or may be assessed at various times throughout the production process. These are specifically targeted objectives that will add the most value to a business by enhancing their performance.
Identifying Indicators
There are a series of steps that a company will wish to pursue when selecting their KPIs. The initial step that needs to be taken is generating a business process. Upon completion of the tasks involved in the business process, organizational goals should be met. Developing a qualitative or quantitative measurement prior to the engagement of a business process is essential in forecasting and evaluating inputs and outputs. Once goals are set, variances between target and actual production can result in tweaks of the business processes to either eliminate bottlenecks or enhance efficiency. KPIs need to be SMART in order to be effective for a company. This means that the metric has to be Specific, Measurable, Achievable, Relevant to the success of the organization, and undergone within a Timely manner. If a goal does not satisfy these qualities, then it may be discredited as a measure that is not essential to the business.
Some key questions to ask when developing KPIs include:
- What is your desired result? Why does it matter?
- How will you measure progress?
- Who is responsible for overseeing goal completion?
- Are the goals of each department aligned with that of the entire organization?
- When will the KPI be measured? How can it be improved?
- The following sections contain a few of the more standard KPIs used by various companies.
Financial KPIs
One of the more obvious measures of success is stemmed from a company’s net profit. The realized number here should be compared to projected revenue to decide if operations are running efficiently. Obtaining a positive gross profit margin can be the difference between a company flourishing or going bankrupt. Another common financial KPI is known as the current ratio. This is calculated by dividing the total number of current assets by the total number of current liabilities. Mangers want this measure of liquidity to be greater than 1 as it suggests the company’s ability to repay its debt obligations.
Other typical financial indicators include an organizations cost of goods sold, sales by region, and cash flow forecasts. Companies want to ensure that they have a positive net cash flow as their revenues exceed costs. Higher revenue growth rates paired with diminishing direct and indirect expenses yields a prosperous return for a business. Targeting some of these measurements will go a long way in ensuring the short and long term growth of a company.
Nonfinancial KPIs
A business needs to rely on more than its balance of cash and debt. Customer and employee relationships are some of the key focal points that need to be developed in an affluent enterprise. KPIs like customer satisfaction and retention rates can drive increased future sales. High measurements here translate into a greater volume and frequency of customer interactions. Reducing the amount of defects in products could be one strategy that would translate to increased customer satisfaction. When consumer satisfaction increases, other potential KPIs can benefit as well. Recommendations will lead to lower customer acquisition costs and can also increase consumer lifetime value. These measures project the amount of money it costs to obtain a new customer and how much revenue one individual is capable of bringing to a company.
In order to establish a positive corporate culture, some employers may also contrive KPIs that measure employee turnover and satisfaction. Having a large number of employees arrive to work late or experiencing increased absenteeism can lead to internal turmoil as unions may be formed and deadlines may be missed. Establishing a low turnover rate paired with a high employee satisfaction rate will attract top talent and higher profit margins for an organization, which can consequently increase market share.
Evaluation
Once a company selects the key performance indicators that matter, it needs to present a timetable to accurately analyze their progress. Activities that are eliciting negative returns can be either tweaked or eliminated from the business processes. Managers will be able to discover which activities had the most profound impact upon their goals, and can ameliorate those specific operations. Positions can be implemented to oversee the most important activities in order to help shape the company’s future. Once these operations are optimized, a company will be better able to address weaknesses and strive to turn them into strengths. The process of selecting KPIs is one that should be taken with great care. No company is perfect, but identifying and evaluating core competencies and operations on a consistent basis can ensure that they are on the most direct path to success.