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What are KPIs? The Importance of Defining KPIs for Your Business

By October 24, 2022No Comments

If you’re in business, you’ve likely heard the term KPIs thrown around regularly. But what are KPIs? In this article, we explore what KPIs (key performance indicators) are, their importance, how to write them, and key examples.

What are KPIs?

Key performance indicators, or KPIs, are quantifiable or measurable values that are used to evaluate your company’s overall performance long-term. KPIs are tied to a specific goal in your business and reveal how successful you are in reaching that goal. 

It is important to remember that KPIs are not the same as metrics. KPIs are the key targets you track in order to reach your business’s strategic goals. Therefore, each KPI must be tied to a strategic goal. Metrics measure your day-to-day business activities that support your KPIs. So while metrics support and impact your company’s KPIs, be sure not to confuse them. 

Why do KPIs Matter? 

Because KPIs are a critical in keeping your company on track to reaching its goals, they are not really an optional component of your business. Establishing and tracking KPIs needs to be a regular part of your business. 

Here are a few of the biggest reasons that you need KPIs in your business: 

  • KPIs ensure that your team is supporting the overall goals of the company. 
  • KPIs keep your employees focused on and moving in the same direction. 
  • KPIs give you a realistic look into the health of your company. 
  • KPIs allow you to clearly see areas of success and areas that need improvement so that you can continue to do what’s working and change what’s not. 
  • KPIs hold your teams accountable by providing a standardized way for employees to track their progress and for managers to move things along. 

How to Define KPIs for Your Business

Write a clear objective for your KPIs

Clearly define how each of your KPIs will be used and tie each one to a strategic goal in your business. If your KPIs don’t clearly relate to your business’s objectives and goals, then you’re wasting your time. 

Remember, your KPIs are key

It’s easy to get carried away with all of the data that you’re able to track with today’s analytics technology. One thing to remember is that KPIs are KEY performance indicators, meaning that you should only focus on your most important targets. Avoid KPI overload by focusing only on the most impactful measures. 

Set both short-term and long-term KPIs

To effectively track the progress of your business, you need to set both short-term and long-term KPIs. Start by setting the long-term goals of your business (including yearly and quarterly goals) then work backwards to determine the milestones (short-term targets) your business must meet along the way in order to reach the long-term goals. Identify the KPIs that you will track in order to determine your success in reaching these goals and milestones. By breaking down your long-term goals, you are able to better able to track your progress along the way and make necessary changes as you work towards your larger targets. 

Clearly communicate your KPIs to your team 

The old adage “teamwork makes the dream work” is true for a reason. Be sure to include your team in your KPI process to ensure that everyone understands the goal they are working towards. It’s important to make sure that your team understands the KPIs and knows how to work with the data so that they can make decisions and take action that moves the needle in the right direction. 

Have a plan to evaluate and adjust

As your business grows and changes, your KPIs will likely need to change, too. Some KPIs may become irrelevant while others may need to be adjusted based on your company’s performance. From the beginning, set a plan to regularly evaluate your KPIs by examining the data and make adjustments as necessary. 

Examples of Key Performance Indicators (KPIs)

There are numerous KPIs your business can use, depending on what specific areas you want to focus on. Here are a few examples. 

1. Financial KPIs

Financial KPIs are designed to help you measure the financial health and progress of your business. Some financial KPIs include gross profit margins, net profit, revenue, and inventory turnover rate. Studying and tracking your business’s financial KPIs can lead to smarter money management and financial growth. 

2. Marketing KPIs

Tracking marketing KPIs can help your marketing team know how to build upon or adjust your current marketing strategy. Some marketing KPIs include customer acquisition cost, lead conversion rate, marketing qualified leads, and return on marketing investment. 

3. Operational KPIs

Operational KPIs measure the success of the internal operations of your business, focusing on organizational processes and efficiencies. Operational KPIs may include employee turnover rate, cycle time, overtime hours, and utilization rate. 

4. Sales KPIs

Focusing on sales KPIs will give you valuable insight to the effectiveness of your business’ sales efforts. Some sales KPIs include lead-to-sale conversion rates, customer lifetime value, and MRR (monthly recurring revenue) growth rate. By tracking these KPIs, you can evaluate your sales team’s performance, improve your sales funnel, and boost sales revenue. 

5. Leading vs. Lagging KPIs

Regardless of the type of KPI, your business should utilize both leading and lagging KPIs. Leading KPIs can help you predict future outcomes, while lagging KPIs track what’s already happened. By using both, you can ensure that your business is tracking what’s important. 

We’re Partners in Your Success

Determining and tracking key performance indicators is a critical component for the success of your business and reaching your goals. So if you’re ready to create a solid, data-based plan for your business and reach your annual goals, our Client Advisory Services are for you.

Our Client Advisory Services allow us to build a transformative partnership with your business. We go above and beyond reporting your finances and become a strategic advisor that allows you to be more proactive, informed, and empowered with your money.

To get started on your path to financial success, schedule your free consultation to discuss how our Client Advisory Services will benefit you. We want to be partners in your success!