What are KPIs?

What are KPIs?

KPI stands for Key Performance Indicator. KPIs “refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance.” (source.)

In other words, KPIs are values to assess the health of a company. They can be financial (such as profit margin or revenue per client) or nonfinancial (like conversion rate or turnover rate.)

Examples of KPIs for Various Industries

All Industries: General Financial KPIs

There are several financial KPIs that can be applied to almost any business.

• Current Ratio: Current Assets / Current Liabilities

  • This measures the company’s ability to pay all of their short-term financial obligations in one year. This is also sometimes referred to as Working Capital Ratio. It measures the liquidity of a company (source.)

  • A current ratio less than 1.0 may indicate the company doesn’t have enough capital on hand to meet current financial obligations. A ratio between 1.5 and 3 is preferrable (source.)
    
    

• Quick Ratio: (Current Assets – Inventory) / Current Liabilities

  • This is a more conservative version of the current ratio, because it removes inventory from the assets used to calculate the liquidity. The reasoning is because inventory isn’t as easy or fast to convert to cash (source)

• Net Profit Margin: Net Income / Sales

  • This measures the profitability of your company by expressing how much of each dollar of revenue is translated to profit.

  • For example, let’s say net income is $50k and sales is $200k. Net profit margin is .25, which means for every dollar coming in, $0.25 is kept as profit.

Retail

• Sales per square foot: Total net sales / Total square foot

  • Measures how effective the business is using its physical retail space

E-commerce

• Revenue per visitor (RPV): revenue / number of visitors

Real Estate Property Management

• Occupancy and vacancy rates

• Cost to turn: average cost to prepare unit for new rental

Human Resources

• Turnover rate or internal promotion rate

• Employee satisfaction rate

Healthcare

• Patient wait times: Time of arrival of patient to dr visit

• Staff to patient ratio

• Bed or room turnover

These are just a few examples of the endless applications of KPIs.

Analysis of KPIs

What do you do with the KPIs once they are calculated?

• Compare to prior periods: Identifying trends from year to year can be helpful in determining the success of the company.

• Industry averages: Comparing your business KPIs to the industry can illuminate where you stand in relation to your competitors

How to choose KPIs

Many factors go into selecting KPIs. Since the possibilities are limitless, you’ll need to narrow it down. A good KPI has the following characteristics (source):

1.     Aligns with company values

2.     Accurate data

3.     Use both lagging and leading indicators

a.     Most financial KPIs are lagging: using sales, profit, cost, etc. These can be helpful but it’s good practice to also use leading indicators.

b.     Leading indicators can help you identify the likelihood of reaching a goal and predict trends 

One final note is to balance your use of KPIs with other management strategies. Numbers and data can be comforting because they give you concrete results, but businesses don’t serve robots. Take KPIs with a grain of salt and remember to keep the human aspect in your business. I recommend especially proceeding with caution when it comes to productivity KPIs, because it dehumanizes your employees. People are a business’ most valuable asset and should be treated as such.

When used correctly, KPIs can help you determine your next direction and strategy to grow your business to the next level. Without them, you risk spending your valuable time on the wrong actions.

Summary

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Additional References

(1)   https://www.pwc.com/gx/en/audit-services/corporate-reporting/assets/pdfs/uk_kpi_guide.pdf

(2)   https://hbr.org/2012/10/the-true-measures-of-success