A key performance indicator (KPI) is a metric that shows how your business is progressing towards its business goals.
A key performance indicator is a way of measuring whether you’re achieving your business goals. It can be used in any level or department in an organisation.
The data you collect from measuring KPIs can help you make the right decisions for your business.
Why are KPIs important?
KPIs are a vital management tool, helping you in your decision making. They tell you if your company is being run in accordance with the goals you’ve set. It also helps you align your teams, so that everyone is on the same page.
Having clear KPIs and being able to document your work towards reaching those goals is important if you’re looking to get investors on board.
Different types of KPI
Businesses can set up and measure KPIs in all areas of the business, ranging from sales goals, to customer relation, internal operation and marketing goals. Project-specific KPIs track progress toward milestones, dates, or key deliverables.
You can for example measure
- revenue growth
- net cash flow
- sales conversion rate—how long it takes to make customers commit to a purchase
- customer churn rate—how many customers fall off after they’ve signed up for your service
- employee turnover
- Inventory carrying costs
High-level and low-level KPI
The KPIs can be high-level, reflecting overall business operations, or lower-level, focusing on specific departments like sales, marketing, or human resources.
A high-level KPI could be revenue growth. If you want your business to grow, or to get investors onboard, the revenue numbers should be going up.
A low-level HR KPI could be, for example, the employee turnover. A high turnover can indicate that employees are dissatisfied, and measuring this KPI lets you quickly take appropriate measures to retain employees.
Leading and lagging KPI
We can also divide KPIs into leading and lagging KPIs. Leading KPIs are predictive, trying to give insight into future events, while lagging KPIs measure past outcomes. For a thorough understanding of how your business is doing, and to make good business decisions, you should measure a combination of the two types.