Business KPI’s: Definition, Types, and How to Develop Them

business kpi picture

The acronym KPI stands for “Key Performance Indicator.” Every business recognizes the value of incorporating data into its decision-making processes. Organizations uses data and metrics (KPI) to assess how close they are to actualising their success goals or business objectives.

Again, KPIs give teams goals to strive for and milestones to track progress. It also provides insights that help decision-makers all around the organisation make decisions that propel the organisation forward. Key performance indicators assist every aspect of the business, from finance and HR to marketing and sales, move forward strategically.

Key Takeaways 

  • A key performance indicator (KPI) is a metric used by organisations to assess how well they are meeting their business objectives.
  • KPIs are the most significant measures for business performance. 
  • KPIs ensure that an organisational team is on track to accompish business objectives.

Why are KPI’s Important?

  • KPIs are a crucial tool for ensuring that your teams are aligned with the organization’s overall goals. In other words, KPI ensures the team in the organisation are on the same page. Teams that have goals that are aligned have better chances of succeeding.

 

  • KPIs reveal the true state of your organisational health. From risk concerns to financial indicators, key performance indicators provide a true picture of the health of your company.

 

  • KPIs enable you to make changes where it is needed. It provides insight that helps you easily understand your achievements and weaknesses,so you can focus on what works and less on what doesn’t.

 

  • With KPIs, you are able to maintain accountability within your teams. Ensuring that everyone contributes value by establishing key performance indicators that allow employees to track their progress and supervisors to take things forward.

 

How To Develop Effective KPI’s

Identify and write down key Performance Indicators.

It’s understandable if you want to measure everything. However, according to KPI best practices, this is not strategic. Only the important metrics are capable of accurately assessing business performance. Therefore, only key performances that aid business success should be measured. 

Share Them With Those Who Will Use Them

Find out what they aim to achieve and how they’ll use the KPI report by talking to the people who will be utilizing it. This will assist you in defining KPIs that are relevant. 

Align KPI’s with the strategic objectives of the company. 

Even though KPIs are tied to specific business operations inside an organization, they must be aligned with the company’s overarching goals or else they will be a waste of time.

Follow The SMART Formula 

The SMART formula is used to create a useful KPI. SMART is an acronym that means your KPI must be Specific, Measurable, Attainable, Realistic and Time bound. 

Adapt them to changes 

As no business is static, so should KPIs change as business changes. You may need to adjust your key performance indicators as your business and consumers change. Perhaps some may no longer applicable, or you may need to make adjustments based on performance. Make sure you have a process in place to evaluate key performance metrics and make changes as needed.

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Types of KPI

Strategic KPI’s

Return on investment, revenue, and market share are examples of strategic KPIs. These KPIs demonstrate the organization’s overall performance. Typically, top management leaders select a handful of them to assess the organization’s performance at a given point in time.

Operational KPI’s:

This KPI focuses on determining the efficiency of an organization’s processes. It is also used to assess a company’s performance during a short period of time. Regional sales, cost per acquisition, and average monthly transportation expenditures are all examples.

Functional KPI’s:

Functional KPIs also fall under strategic and operational KPIs. They are tied to the functional units of the organization. For instance, financial KPIs measure gross profit margin or growth in revenue, while marketing KPIs measure the numbers of qualified leads and conversion rates.

Leading vs Lagging KPI’s:

Organizations employ a combination of the leading and lagging Indicators to make sure they’re tracking the most important information. Leading KPIs  assist in the prediction of outcomes, while lagging KPIs track what has already occurred. 

 

Examples What is KPI?

KPI measures vary from industry to industry.  In fact, the ones that are key will depend on an organisation’s strategy. However, below are some common examples of KPIs that organisations use to measure performance.

Sales KPI’s

They track and monitor sales key performance indicators, including leads, opportunities, closed sales and volume, to ensure teams are hitting sales targets. Here are a couple of examples.

  • New Inbound Leads
  • Lead Conversion Rates
  • Product performance

Finance KPI’s

  • Net Profit Margin
  • Gross Profit Margin
  • Operational Cash Flow
  • Current Accounts Receivables
  • Inventory Turnover

Operations KPI’s

  • Order Fulfillment Time
  • Time to Market
  • Employee Satisfaction Rating
  • Employee Churn Rate

Marketing KPI’s

  • Return on investment on ads
  • Social media ROI
  • Brand Awareness
  •  Website Traffic

Customer relations KPI’s

  • Customer satisfaction
  • First Contact Resolution Rate
  • The number of customer complaints
  • The number of calls to customer service
  • Average Response Time

 Employee Performance KPI’s

  • Number of projects finished in a given time frame
  • Number of units processed in a given time frame
  • Sales quotas and other personal goals
  • Job happiness 
  • Customer satisfaction 
  • Work speed
  • Absenteeism 

Human Resources KPI’s

  • Employee turnover
  • New hires
  • Cost per hire
  • Salary competitiveness ratio
  • Number of promotions 
  • Retirement rate
  • Employee satisfaction

KPIs vs Metrics

KPIs and metrics are frequently used interchangeably. They don’t, however, mean the same thing. All measures that an organization employs to monitor business performance are referred to as metrics, but KPIs are the most critical metrics that are used to evaluate the overall performance of the organisation. 

Futhermore, to make your key performance indicators generate the results you want, you should improve data literacy within your organization or team so that everyone is working toward the strategic goals. Also, you will need to revise your key performance indicators depending on the market, customer, and organizational changes to keep them current.

Finally, make sure you have a good mix of leading and lagging indicators. Because a mix of the leading and lagging indicators will help you know how well you are doing in comparison with your strategic goals. It will also equip you to make better decisions for your team or the organisation. 

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