Also referred to as key success indicators KSIs , KPIs vary between companies and between industries, depending on performance criteria. For example, a software company striving to attain the fastest growth in its industry may consider year-over-year YOY revenue growth, as its chief performance indicator.
Contrarily, a retail chain might place more value on same-store sales, as the best KPI metric in which to gauge its growth. Key performance indicators KPI gauge a company's output against a set of targets, objectives, or industry peers. Key performance indicators tied to the financials typically focus on revenue and profit margins. Net profit, the most tried and true of profit-based measurements, represents the amount of revenue that remains, as profit for a given period, after accounting for all of the company's expenses, taxes, and interest payments for the same period.
Calculated as a dollar amount, net profit must be converted into a percentage of revenue known as "net profit margin" , to be used in comparative analysis. The gross profit margin, which measures revenues after accounting for expenses directly associated with the production of goods for sale, is another common profit-based KPI.
A financially healthy company typically has sufficient cash on hand to meet its financial obligations for the current month period.
However, different industries rely on different amounts of debt financing, therefore a company ought to only compare its current ratio to those of other businesses within the same industry, to ascertain how its cash flow stacks up amongst its peers.
Customer-focused KPIs generally center on per-customer efficiency, customer satisfaction, and customer retention. Customer lifetime value CLV represents the total amount of money that a customer is expected to spend on your products over the entire business relationship. Customer acquisition cost CAC , by comparison, represents the total sales and marketing cost required to land a new customer.
Process metrics aim to measure and monitor operational performance across the organization. By dividing the number of defective products by total products produced, for example, businesses can measure the percentage of defective products. Naturally, the goal would be to get this number down as low as possible. Throughput time represents the total amount of time it takes to run a particular process. For example, a drive-through restaurant throughput can measure how long it takes to service an average customer; from the time they make their order to the time they drive away with their food.
These numbers are all from their Q1 earnings release. During the quarter, Tesla produced a record , vehicles and delivered nearly , vehicles.
Production is a big deal for the company because it has consistently been criticized for being bad at ramping up. Increased manufacturing scale means more market share and profits for Tesla. For the quarter, Tesla's automotive gross margin expanded by one percentage point to Gross margin is one of the best measures of profitability for Tesla because it isolates its vehicle production costs.
Tesla managed to expand its gross margin in Q1 even as sales of lower-priced models outpaced its higher-margin models. Tesla's current level of free cash flow production suggests that the company is reaching a scale of profitability without the help of regulatory credits.
Some of the disadvantages to using KPIs include:. KPIs do not necessarily have to be solely tied to financial data. Common non-financial KPIs include measures of foot traffic, employee turnover rates, the number of repeat customers versus new customers, and various quality metrics.
KPIs vary from business to business. But in general, five of the most commonly used KPIs include:. It depends on the actual KPI being measured. Metrics measure the success of everyday business activities that support your KPIs. Download eBook. Keep your teams aligned: Whether measuring project success or employee performance, KPIs keep teams moving in the same direction. Provide a health check: Key performance indicators give you a realistic look at the health of your organization, from risk factors to financial indicators.
Hold your teams accountable: Make sure everyone provides value with key performance indicators that help employees track their progress and help managers move things along. Types of KPIs. Strategic: These big-picture key performance indicators monitor organizational goals. Executives typically look to one or two strategic KPIs to find out how the organization is doing at any given time.
Examples include return on investment, revenue and market share. Operational: These KPIs typically measure performance in a shorter time frame, and are focused on organizational processes and efficiencies. Some examples include sales by region, average monthly transportation costs and cost per acquisition CPA. Functional Unit: Many key performance indicators are tied to specific functions, such finance or IT. While IT might track time to resolution or average uptime, finance KPIs track gross profit margin or return on assets.
These functional KPIs can also be classified as strategic or operational. Leading vs Lagging: Regardless of the type of key performance indicator you define, you should know the difference between leading indicators and lagging indicators. How to Develop KPIs. This will help you define KPIs that are relevant and valuable to business users. While they may be related to a specific business function like HR or marketing, every key performance indicator should tie directly back to your overall business goals.
This is why data literacy is so important. When people understand how to work with data, they can make decisions that will move the needle in the right direction. Plan to iterate: As your business and customers change, you may need to revise your key performance indicators.
Perhaps certain ones are no longer relevant, or you need to adjust based on performance. Be sure you have a plan in place to evaluate and make changes to key performance indicators when necessary. Avoid KPI overload: Business intelligence has given organizations access to mounds of data and interactive data visualization , making it easy to measure anything and everything.
Keep in mind that the key performance indicator definition refers to the most important targets. Steer clear of KPI overload by focusing on the most impactful measures. Lagging indicators help you understand results over a period of time such as sales over the last 30 days.
Leading indicators help you predict what might happen based on data, allowing you to make adjustments to improve outcomes. Increase data literacy in your organization so everyone works toward strategic targets. Educate employees, assign them relevant KPIs, and use a best-in-class BI platform to keep everyone making decisions that move your business forward.
Iterate: Keep your key performance indicators current by revising them based on market, customer and organizational changes. Meet regularly to review them, take a close look at performance to see if adjustments need to be made, and publish any changes you make so teams are always up to date.
Take a deeper dive into using these three steps:. KPI Examples. Finance Sales Marketing. IT Customer Service. The realization and standardization of the KPI therefore has to be time phased. Fulfilling the five conditions will make up for a good KPI, but the process of managing a well grounded KPI requires consistent evaluation and modification where necessary.
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