We bet that you probably have heard “KPI” at least once in your life. We even mentioned it in a previous article about KPI reports and why they are important. Today we are going to try to broaden the knowledge around KPIs, what they are all about, why you should know more about them and why every business should use them. As per usual, pick your preferred refreshment, and let’s press on, shall we?

What is a KPI?

KPI, also known as a Key Performance Indicator is a measurable mark that is used to determine the efficiency of a business operation. They help with gauging a company’s strategic, financial, and operational performance and provide a clearer overall vision of how an organization is functioning. They are important for people across all levels of a company, as well as for stakeholders, who can view if progress is made and if the business is on track. KPIs are also useful because they:

Help with employee accountability – by tracking progress on every level, team leaders can see how well individuals on their team are performing and if they are meeting their goals. This can help with overall morale – award employees who hit their target and provide additional training and support for those who aren’t able to.

Alignment – KPIs set a common goal that everyone can get behind. This works on a team level, as well as on an organizational level. Managing to keep everyone aligned with the important objectives is crucial.

Overview of a business’s health – by tracking, measuring, and analyzing what’s important, an organization can get an overview of how well it’s functioning. For instance, employee retention rates can paint a picture of the company’s culture. Assessing similar data and taking the necessary actions are a must if a business wants to operate better and longer.

Examples of KPIs

Revenue, expenses, and profit are the golden trio of KPIs that everybody is aware of. Beyond them, other commonly used KPIs are gross and net profit margins, which measure how much money a business makes when they are selling their products; cost of goods sold, which measures the materials and labor expenses when a product is being made; inventory turnover, which tells how fast products held in inventory are sold. 

Depending on the industry, every business chooses to track a specific set of KPIs which are relevant to their operations. If for example, a company operates in customer service, they will opt for tracking KPIs such as first-call resolution rate, call abandonment rate, call hold time, etc. Or a business in manufacturing will follow KPIs such as manufacturing cycle time, carrying cost, percentage of out-of-stock items, etc. 

A specific real-life example can be given with the electrical automotive giant Tesla. The numbers below are from their Q4 2021 update. You can view the full report here.

Vehicle production – the company produced 305,840 vehicles and managed to deliver 308,650 vehicles. Ramped-up production means more market share and profits for the company.

Automotive gross margin – Gross margin provides a very clear sign of profitability for Tesla, as it isolates its vehicle production costs. Based on the report it expanded to 30.6% even as sales of lower-priced models outpaced its higher-margin models.

Free cash flow – in the previous year-ago period the free cash flow was $1.9 billion, compared to the $2.8 billion during the quarter there’s a significant difference. The larger amount of free cash flow is an indicator that the company is reaching a scale of profitability without the help of regulatory credits. 

How are KPIs usually used? 

The previous example provides a rather clear idea of how KPIs are utilized. Often times its better for businesses to pick a set amount of KPIs to track. Not only its easier to collect, maintain and analyze the data needed for the reports but also it gives a better idea of what the company aims to achieve and where it should go in the long term. Tracking too many KPIs can be extremely complicated and more often won’t lead to positive results.

KPIs help to shine a better light on how well a business is doing. Leading KPIs can help with assessing information from past events to help better navigate the future. They are used to give the company’s leaders a tool to help them evaluate overall performance and to make meaningful data-driven changes to address possible problems. Lagging KPIs on the other hand try to foresee and warn company leaders of possible issues in the future. For example, profit margins are a result of operations and are considered a lagging indicator. Alternatively, the number of overtime hours worked, can be a leading KPI if the company notices a poorer manufacturing quality.

What do KPIs mean for the business? 

As with everything, KPIs have their advantages and their limitations. An example of the prior is when KPIs inform management of specific issues, which they can resolve properly and ensure that everything is in order. Key performance indicators also act as a bridge between business operations and business goals. Without the ability to track progress, a company can’t really navigate well toward those goals.

In order for KPIs to provide meaningful and accurate data, they have to measure parameters for a longer time frame. For example, for a company to properly assess employee satisfaction and overall morale it might have to collect data from the whole year. KPIs also require constant monitoring and processing. If I KPI report is made but is never analyzed it serves no purpose. 

The bottom line

A carefully selected and managed set of KPIs can help to provide key information for managers to use and analyze in order to progress toward a specific goal. A KPI can track and measure numerous factors most of which are used to assess performance, with the ultimate goal to help leaders to make more informed business decisions. By understanding better what KPIs are, their advantages and downsides, and how to properly implement them, businesses are able to optimize for long-term success.