Why is it important for a business to use Key Performance Indicators (KPI's)
Key Performance Indicator is business metrics which measures the value that how effectively an organization is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the enterprise, while low-level KPIs may focus on processes in departments such as sales, marketing or a call center.
Key Performance Indicator differs from organization to organization based on business priorities. For E.g. Key Performance Indicators for a public company will be its stock price, while for a privately held start-up it may be the number of new customers added each quarter.
How to create Key Performance Indicator for your organization:
Creating meaningful KPIs that track, and clearly visualize performance takes some planning. Each metrics needs to address a specific business objective and provide timely, accurate information to assess progress towards goals.
Before creating KPI's, you should ask few critical questions to yourself.
What questions are you hoping to answer through your KPIs?
Do these questions link directly to the objectives of your plan?
Are you collecting the data required to answer these questions, or focusing simply on the data you know you can quickly obtain?
How frequently will you be monitoring your progress against your KPIs?
1: Establish a clear objective.
If your business objective is to be the market leader, then your KPI should indicate what steps you should take to increase your revenue this financial year or expanding your product line in future.
In simple terms, KPI should be made to show you the guidance to achieve your business objective and to keep in mind which phase or part is most important to reach your goal.
2. Outline the criteria for success.
What should be the target? Is it possible to achieve? What is the timeline to achieve that objective? How will you monitor the progress? Whatever the objective of your business is it should be realistic. You can make any changes in the process but as said everything takes time so this will too.
3. Collect the data.
Investigate the availability and accuracy of the data. You can get the data form any report which is maintained internally, externally or hidden reports. It's essential to synchronize the data which is required to monitor the progress of your company.
4. Build the KPI formula.
Some KPIs contain but a single metric or measure. However, most rely on a combination brought together under a unique calculated formula. For example, a KPI that measures productivity in revenue by machine would look like this: Total Revenue divided by the total number of machines. Build formulas and create calculations with test data to see if the results are what you would expect.
5. Present your KPIs.
It’s not possible that every individual will understand the matrics of the KPI, therefore, it is very essential to convert your KPIs data into understandable visuals such as graphs and charts. Dashboards for Operational KPIs or Reports for Strategic KPIs offer a convenient way to create, track and distribute your KPIs.
Some popular types of KPIs
If you are a financial institution or organization then your KPI should show how much your financial condition is improving in day to day. This KPI will measure the financial success of your business; it could be revenue, net income, cash flow the health of your balance sheet or other which is more specific to your business or organization.
This level KPI will monitor the operation of your organization, which includes your production process, shipment process etc. for e.g. if you are an FMCG company how long do products stay in that inventory before they are sold.
All business need to attract new customers even if you don't want to become a market leader. This level KPI will help you to monitor your growth and will help you to create different strategies which you need to track for your growth.
Bringing in new customers is good but keeping your existing customer happy is more important. This group of KPIs tracks the happiness of your current customers usually based on regular surveys and metrics or insights, although you could measure it in other ways, such as the number of repeat purchases.
You could use a simple KPI like overall customer satisfaction, or you could look at more detailed metrics like the speed of purchase, resolving problems, levels of customer engagement with your products or apps, interactions on social media, etc.
How to measure KPIs
Once key performance indicators have been identified, then it should be clearly communicated to all your employees to all levels of the organization to understand which business metrics matter the most and what needs to be done for the successful performance against them. This could include the entire workforce on broad corporate KPIs or smaller groups of workers on ones that apply to particular departments.
Good vs. bad business KPIs
In most companies, KPIs are automatically tracked via business analytics and reporting tools that collect relevant data from operational systems and create reports on the measured performance levels. Increasingly, KPI results are presented to executives on business intelligence dashboards or performance scorecards that often include charts and other data visualizations, with the ability to drill down into the performance data for further analysis.
Multiple KPIs also underlie balanced scorecard frameworks that pull together sets of metrics in an effort to provide a broader view of business performance beyond operating income and other common financial measurements.
Managers must continually evaluate KPIs to ensure they're still relevant and aligned with priorities in business operations. If individual KPIs no longer serve a useful purpose, they need to either be refined or replaced altogether.
What is KPI? And how they can help your business. You’ve seen some examples of different types of KPIs, and you’ve learned how to set effective KPIs. Monitor your KPIs regularly and how to refine them to ensure they stay relevant.