KPI stands for Key Performance Indicator. It is a value that identifies how effectively a business is achieving its most important or key business objectives. It is an essential measure that helps a company to gauge its performance over a considerable period. Every business is different from each other in many aspects, be it operational, communications, marketing, etc. Having said that, every company should have its own set of objectives that should determine the success of the company. The mistake that some companies make while using this technique is that they adopt the industry established performance indicators and use them to assess their own business.
What is essential for companies to realize is the fact that every indicator should be personalized in a way that it determines the effectiveness of your business. For example, let’s take a common KPI: “number of monthly sales”, and 2 different businesses, a milk seller and a refrigerator seller.
If both of these businesses adopt this same measure, the milk seller will obviously surpass the refrigerator seller because milk is bought more frequently hence the ‘number’ of sales may be higher as compared to the refrigerator which is a durable hence lower number of sales. In this case, the success of a refrigerator seller should depend on the “money value” of his sales rather than their number. Below we will be taking examples and analyzing some of the KPIs, so if that interests you, stay tuned!
EXAMPLES OF SOME COMMON KPIs:
- Cost of Goods Sold: tallying up the collective production costs of all your goods is essential for you to figure out a specific markup or margin percentage and profit accordingly.
- Sales by region: by focusing on which region demands your product the most, you can either shift production processes to that specific area or maybe introduce marketing schemes targeting people in that area specifically.
- Percentage of product defects: obviously, mistakes do happen, but tracking their frequency is what this indicator does. Improvement techniques can then be implemented accordingly.
- Employee turnover rate: if none of your employees staysfor more than a month, there is for sure something wrong with your company’s policies. That could be figured out by a numeric that this indicator provides, leading you to maybe re-assess some of your labor policies.
- Salary Competitiveness Ratio: this is one of the most important aspects of the labor market. Salary is one of the most important factors employees consider while joining a firm. Now, if you want to recruit someone with high skills then obviously you do want to pay them more than the average so that their opportunity cost of not working rises, consequently attracting them to your firm. This indicator is numerically calculated by dividing your company’s average salary by the one offered by your competitors.
OPEN-ENDEDNESS OF INDICATORS
The popular departments in any company include marketing, operations, communications, finance, human resource, etc. Any company’s success depends on the collective effort of all the departments. Hence, any indicator that is used should be understood completely by all the departments so that when it is implemented, there is a holistic approach and not a single game. If, for example, one indicator is identified as customer satisfaction, so the whole company needs to view its customer satisfaction according to their department.
NATURE OF THE KPI
A couple of distinguishing factors outset usual KPIs from effective KPIs. One of them being its ability to be measured. Measurement is usually attributed to quantitative analysis and is implemented that way in most of the cases. One instance may include the amount of external funding or loans a business requires. An effective KPI would measure how the firm’s dependency on external financing has changed over time, a decrease may be favorable. In the case of loans, short term business loan calculators onlinecan go a long way in assisting the finance department in its calculation process.
FREQUENCY OF REPORTS
The number of times, or frequency, a KPI is crucial to every business. If you calculate your KPI a lot of times, employees may be overwhelmed with data and will not know how to handle it. Calculate your KPI once in a blue moon and it would be as similar to not calculating it at all.
Figuring out the time after which your indicator should be calculated and analyzed is extremely crucial. For example, the percentage change in your profit could be calculated once every month so that measures are taken accordingly to improve the profits every month.
SIMPLICITY
Remember that simplicity is the key, even in the corporate sector. It is very advantageous if your employees understand what the indicator is being used for and how do they want to change their performance accordingly. It is advisable to keep the KPIs according to the size of your company or business. That being said, even if you have a large company with tons of data, opting for too many KPIs will not be a good idea as it will essentially result in chaos. A moderate number of KPIs which are effective will hopefully produce the same result.
COMMUNICATION
If you happen to be the manager, owner, or a person responsible for the performance of your employees, it is your responsibility to analyze the company’s performance over a specific time. You should call a meeting involving all the employees and outline as to what needs to be done to improve the company’s name in the market. You should highlight the short term and long term goals.
One way to improve worker morale could be by giving out bonuses to the ones performing extremely well and being the reason for an improved indicator. For example, if your marketing team is the reason for boosting sales from the past two months, it would be a nice idea to give them some extra bucks so that their productivity rises even more in the upcoming months.
RELEVANCE
Lastly, every person in the company should know which KPI concerns him or her. For example, a decrease in customer satisfaction should be questioned by the sales, marketing or the human resource department instead of the finance department. Number related queries should go to the finance or the operations department. Accountability and organizational skills are crucial at every point and should never be neglected.
THE FINAL WORDS:
Most companies measure the change in certain variables over a period of time, e.g., change in profit, sales volume, number of sales, etc. The measurement using this technique is called measuring or analyzing at the “marginal”. This is an important phenomenon used by most economists in developing economic theories and is also implemented by most businesses. It concludes how an ‘extra’ or an additional unit of something brings about an overall change.
Analysis using the marginal approach has proven to be far more effective than using the total approach. Moreover, some companies also hire experienced financial analysts who design, calculate and modify the company’s indicators based on their performance.
Consequently, company policies and general meetings are also called accordingly. Obviously, hiring an extra team will cost the company a certain amount, but if that is less than the benefit gained you should go for it. Most companies decide this by using the “Cost-Benefit Analysis (also known as CBA)”, which quantifies the costs incurred to the company and the benefits and then concludes whether or not an organization should go forth with a certain decision.
After all, in this fast-moving globalized world, contestable markets are becoming extremely common and to give some sort of control and edge over your competitors.
