Organizations use KPIs at various levels to monitor their progress toward their goals. Low-level KPIs may be focused on processes in departments like advertising, marketing, HR, and support, whereas high-level KPIs may be focused on the company's overall efficiency.
We will go over the following:
- What is a Key Performance Indicator?
- Types of KPI
- How to Develop KPI?
What is a Key Performance Indicator? 🔑
A key performance indicator (KPI), also known as a performance indicator, is a type of metric used to assess performance. KPIs are used to measure the progress of an entity or a specific operation such as projects, services, goods, and other initiatives.
Success is often characterized in terms of making progress against strategic objectives, while other times it is defined as the repeated, periodic achievement of certain levels of organizational goal (e.g. zero defects, 10/10 customer satisfaction). As a result, selecting the appropriate KPIs necessitates a thorough understanding of the organization's priorities. What is considered relevant also varies depending on the department measuring results – for example, finance KPIs may vary from sales KPIs.
Since it's important to know what's important, different strategies for assessing the current state of the company and its main activities are linked to the selection of performance indicators. Performance metrics are often correlated with 'performance enhancement' programs since these evaluations often contribute to the detection of future changes. A management system, such as the balanced scorecard, is a popular way to select KPIs.
In the traditional decision-making phase, the relevance of such success metrics is evident (e.g. in the management of organizations). When weighing multiple choices, a decision-maker must be able to correctly analyse the current situation in order to predict the outcomes of potential decisions.
Types of KPI 🧐
Revenue and profit margins are usually the subject of financial key performance metrics.
- Net Profit
After paying for all of the company's costs, taxes, and interest charges for the same period, net profit, the most tried and tested of profit-based calculations, measures the amount of income that remains as profit for a given period. To be used in comparative analysis, net profit must be converted from a dollar sum to a percentage of sales (known as "net profit margin").
- Financial KPI
The "current ratio" is a financial KPI that focuses on liquidity and is determined by dividing a company's current assets by its current debts. A financially sound business typically has enough cash on hand to fulfill its financial commitments for the next 12 months. However, since different companies depend on different amounts of debt funding, a company's current ratio can only be compared to that of other firms in the same sector to see how the cash flow compares to its peers.
How to Develop KPI? 😎
You must understand how a KPI contributes to a particular business result or goal while writing or designing it. KPIs should be tailored to your company's needs and designed to assist you in achieving your objectives. When creating a KPI, follow these steps:
- Create a Clear Goal for Your KPI 🤩
One of the most critical aspects of creating KPIs is writing a straightforward goal for your KPI. The main business goal should be closely linked to a KPI. It's not just a business goal or something that everyone in your company thinks is important. It must play a crucial role in the organization's performance.
Otherwise, you'll be shooting for an objective that doesn't correspond to a business goal. That means you're working for a mission that has no bearing on your company at best. In the worst-case scenario, your company would waste time, money, and other resources that could be better used elsewhere.
- Stakeholders should be Aware of Your KPI 🤝
If the KPI isn't expressed correctly, it's useless. How are your workers, who are charged with carrying out your company's vision, expected to achieve your objectives if they don't know what they are?
Or, perhaps worse: If you don't share your KPI, you risk alienating and disappointing your staff and other stakeholders, who won't be able to see where your company is going. Sharing your KPIs with your stakeholders, on the other hand, is one thing (though even this is something that too many organizations fail to do). More importantly, they must be shared as soon as possible.
- Review the KPI on a Weekly or Monthly Basis 🤓
It's important to keep track of your KPIs on a regular basis if you want to keep them in good shape. Obviously, monitoring your progress against the KPI is critical (otherwise, why would you have set it in the first place?) Tracking your development, on the other hand, is crucial for determining how good you were in creating the KPI in the first place.
Not all KPIs are successful. Some people have unattainable goals (more on that below). Some people don't keep track of the underlying business target they're expected to meet. You can only decide whether it's time to update your KPIs if you check in on a regular basis.
- Adapt Your KPI to the Changing Needs of Your Business 🙂
KPIs that aren't modified on a regular basis will easily become obsolete. Let's say your company has recently launched a new product line or expanded internationally. Your team will continue to chase goals that don't actually capture the shift in tactical or strategic direction if you don't update your KPIs.
You will believe that you are continuing to perform at a high level based on your performance. In fact, you might be monitoring KPIs that don't accurately represent the effect of your efforts on underlying strategic goals.
Reviewing your KPIs on a monthly (or, preferably, weekly) basis will allow you to fine-tune – or even completely change course. You can also discover new and probably more effective routes to the same place.
- Verify that the KPI is Attainable ✔️
Setting realistic goals for your team is critical. If you set a goal that is too lofty, your team will give up before they even begin. If you set a goal that is too big, you'll find yourself asking what to do with yourself two months into the calendar year after you've met your annual targets.
It's important to assess your current results. You're left searching for figures that have no basis in fact if you don't have this. Your current output is also a good place to start when determining which areas you need to work on.
Start digging through the data you've already gathered to provide a benchmark for your previous achievements. Google Analytics, as well as more conventional accounting methods that monitor sales and gross profit, are excellent for this.
- Revise Your KPI Objectives 😇
KPIs aren't set in stone. They must constantly adapt, upgrade, and adjust to keep up with the times. You risk chasing goals that are no longer important to your business if you set and forget your KPIs. Make it a habit to check in on a regular basis not only to see how you're doing against your KPIs but also to see which ones need to be modified or eliminated entirely.
KPIs are an important tool for determining the performance of your company and making the necessary changes. On the other hand, personal KPI has its own limitations. The most crucial aspect of every KPI is its usefulness. You should not hesitate to chuck it once it has outlived its usefulness and begin working on new ones that better fit with your underlying business goals.
Do share your thoughts about the Key Performance Indicator with us at LeadMine.