What is a key performance indicator (KPI)

A Key Performance Indicator (KPI) is a quantifiable metric used to assess a company’s progress toward achieving its strategic and operational objectives. KPIs are used in business as a quick indicator of a company’s financial health and well-being.

At its core, a KPI represents a measurable indication of progress towards a business goal. These metrics can be high-level, reflecting overall business operations, or lower-level, focusing on specific departments like sales, marketing, or human resources.

Financial KPIs, derived from accounting data, provide insights into areas such as revenue growth and net cash flow. Examples encompass employee turnover and inventory carrying costs. Monitoring KPIs over time facilitates data-driven decision-making, fostering a virtuous cycle of improvement.

Why Are KPIs important for businesses?

KPIs serve as vital management tools, offering focus, clarity, and guidance for behaviour and decision-making. They enhance transparency and accountability, reflecting a company’s mission and values across the organisation. The guide underscores the significance of selecting appropriate KPIs aligned with business goals and leveraging their power when analysed over extended periods.

Types of Key Performance Indicators (KPIs)

KPIs can be categorised based on perspectives such as customer, financial, growth, and process focus.

The “balanced scorecard” framework provides a structure, with examples ranging from customer satisfaction to financial metrics like days sales outstanding (DSO). Additionally, project-specific KPIs track progress toward milestones, dates, or key deliverables.

Leading and lagging KPIs

The distinction between leading and lagging KPIs influences decision-making, especially regarding timing.

Leading KPIs are predictive, offering insight into possible future events, while lagging KPIs measure past outcomes. A combination of both types is recommended for a comprehensive understanding, allowing for accurate interpretation and timely adjustments.

KPI examples

Organisations have a plethora of KPIs at their disposal, including examples in sales, finance, customer relations, operations, and marketing. Examples range from sales conversion time to customer churn rate, offering a diverse toolkit for measuring performance across various business functions.