What Is a KPI (Key Performance Indicator), and Why Is It So Important?

What is a KPI?

Love them or hate them, KPIs are the backbone of your business.

What is a KPI?

KPIs, or key performance indicators, can help you understand if your company is on the right track for success—and if it’s not, where to focus your attention. No matter what it measures, the aim of any KPI is to bring about improvement.

In addition, today’s finance leaders want to spend more time thinking about frameworks for measuring results in the form of KPIs and using these KPIs to guide course correction to drive business performance.

Learn How to Find Hidden KPIs You’re Missing.

But with the amount of data that today’s businesses and organizations generate, it is important to choose the right metrics and indicators. At the same time, KPIs must be aligned with your company’s overall strategy and objectives.

Get them right and corporate performance will improve. Get them wrong and you will be focusing on indicators that have no overall positive impact on your business.

Therefore, it is critical for finance practitioners to understand the difference between a measure, a metric, and a KPI. Just because you can measure something doesn’t make it a metric. And even though you may have identified a metric, that doesn’t automatically make it a KPI. Simply put, KPIs derive from metrics—which are created out of measurements.

Got that? Ok, good. Now for the important part: You must be able to measure a KPI. And everybody within your organization needs to measure it in the same way.

Converting metrics into KPIs

A measurement can be number of customers, number of sales, or total revenue. Metrics are important, but until you start making comparisons they are simply numbers. A metric is typically a combination of two or more measures, such as the number of customers over time or the total revenue over time. Metrics illustrate whether the values are good or bad and can help with financial forecasting and benchmarking.

A metric becomes a KPI when it is put in the context of a particular organization or industry. A KPI adds meat to the detail, so ratios and percentages often make better KPIs than just the number of things in a group.

What makes a good organizational KPI, and how many should you have?

Overall, you should have no more than 5-6 KPIs developed at an executive or leadership level, although each department will have their own.

KPIs give executives the chance to communicate the mission and focus of the organization to investors, team members, and other stakeholders. As KPIs filter through the organization, they must grab employees’ attention to make sure that everyone is moving together in the right direction and delivering value to the business.

Furthermore, visualizing KPIs through finance and operations dashboards makes it easier to quickly get a sense of how well the organization is meeting its KPI goals. The most effective companies also incorporate their KPIs into a rolling forecasting process so they can keep their eyes on the prize as this business evolves.

Departments, and even individuals within an organization, may have their own KPIs. But it is important that they understand the context of what they are being measured against and how it fits within the broader business strategy and goals.

KPIs vary depending on your business and industry

The KPIs that a company or organization measures will vary depending on the type of business and industry, its customers, and its staff. However, they are likely to include some of the following:

  • Net profit
  • Net promoter score
  • Customer engagement
  • Customer complaints
  • Market share
  • Share of voice
  • Carbon footprint
  • Supply chain miles
  • Waste recycling rate
  • Employee satisfaction
  • Staff churn
  • Return on investment (ROI)

Once you have defined your business’ goals and strategy, identifying and aligning the KPIs for your business will be much simpler. In addition, integrated, built-in analytical dashboards enable continuous monitoring of business performance, including operational data and KPIs to inform plans and decision making.

Watch the webcast, “5 Reasons to Think Beyond Spreadsheets”

Our CFO Indicator Q3 2017 survey explores CFOs’ confidence relative to data and technology, as well as their progress in moving toward a “single source of truth” (single source of financial and operational data). Results reveal that Finance has successfully cleared what we believe to be one of the most significant hurdles—their hesitancy to store data in the cloud. Read our other CFO Indicator reports here.

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