Establishing a Key Performance Indicator

 

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What is a KPI?

A key performance indicator (KPI) refers to a measurable unit of value which demonstrates the progress of a company in achieving its key business objectives. It is common for organizations to use KPIs in order to evaluate their success with regard to their targets. There are several types of KPIs that can be used by an organization. These KPIs can vary depending on the kind of industry and environment in which an organization operates, or what specific objectives or targets an organization wants to focus on.

Moreover, KPIs are used at multiple levels. High-level KPIs can focus on an organization’s overall performance, while low-level KPIs can focus on specific processes of certain departments such as human resources, marketing, sales, and support, among others. An organization must not blindly adopt KPIs or a strategy for formulating KPIs. The analysis team of the organization must start with the basics, understand what the needs and objectives of the organization are, how the organization plans to achieve those objectives, and who the people to carry out the plan are. Feedback is also an important consideration in order to complete a KPI analysis.

KPIs to Measure Financial Performance

There are common KPIs used by businesses in order to measure their performance. Sales KPIs include the number of contracts perfected for a certain period, the hours spent for a particular sales activity, the resources used for manufacturing or creating a product, and net sales, among others. Meanwhile, examples of common KPIs used in the aspect of finance include the net profit margin, growth in revenue, gross profit margin, current accounts receivables, and inventory turnover, among others.

Anatomy of a KPI

be quantifiable and outcome-based. The basic anatomy of a KPI includes the following:

1. Measure – this refers to the quantifiable aspect of a KPI

2. Target – every KPI should have a specific target and its corresponding measure and time period

3. Data source – every KPI must have a well-defined data source so it is clear how the KPI is being tracked and measured

4. Reporting frequency – different KPIs have different reporting frequencies; however, it is recommended to have a report on them at least once a month

Important Things to Consider when Choosing a KPI

Besides learning how to create a KPI, it is equally important to assess the relevance of a certain KPI in the first place. If an organization only focuses on relevant KPIs, then it will not be wasting time and resources in tracking the progress of a KPI. To evaluate the relevance of a KPI, the organization must consider how a KPI relates to a particular business objective or outcome. KPIs should be customized to the business situation of the organization.

Thus, when creating a KPI, the organization must first write a clear objective for the KPI. It has to be intimately connected with a business objective and it must be something that is integral to the success of the business. Second, the KPI should be communicated properly with the various stakeholders. Third, the KPI must be evaluated and reevaluated if necessary to ensure its continued relevance and needs for improvement.