Key Performance Indicators - Explained
What are KPIs?
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Table of ContentsWhat are Key Performance Indicators (KPIs)?How are KPIs Used? Financial KPIsNon-financial KPIAcademic Research on Key Performance Indicators
What are Key Performance Indicators (KPIs)?
Key performance indicators are a set of measures that companies and corporations use to evaluate their progress financially and to what extent they have met their strategic goals. These quantifiable measures are also important when evaluating how a business is fairing against its competitors.
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How are KPIs Used?
Also christened Key Success Indicators, KPI measures are different in different companies and industries.
The factors that determine measures to use include priorities, strategic goals and performance criteria.
For instance, one company might have strategic goals to grow the fastest in its industry while another might have a goal to exland its reach wide within a year. For the first company, KPI will be annual revenue while for the second; KPI will be same-store sales.
Financial KPI are common in most companies. Usually companies compare their annual revenue from different years to assess progress.
In this case, the company calculates the net profit, which is the amount of revenue that remains after deducting expenses, interests paid and taxes.
Net profit is calculated in dollars and it must be shown as a percentage of the gross revenue for effective comparison. If, for instance, the standard net profit in a given industry is 50 percent, new companies need to create strategic plans that propel then to 50 percent net profit.
Companies also consider gross profit margin, revenue after deducting production costs, when analyzing performance.
Companies also use their current ratio as KPI.
Here, the companies divide its assets by its debts. A financially healthy company should have enough funds to sustain itself for the next 12 months.
Since different industries calculate current ratios differently, a company can assess its financial health by comparing its current ratio with other companies in the industry to evaluate whether it fails within industry standards.
KPI is more about financial health but there are other factors that determine performance including its relationship with customers and employees.
Companies can use KPIs such as employee turnover, foot traffic or number of new and repeat customers.
Non financial KPIs are linked to company's aims and they keep changing as the company progresses.