What are Key Performance Indicators (KPIs) and Why Are They Important?

A KPI is defined as a Key Performance Indicator. Key Performance Indicators (KPIs) and metrics are graphical measurements of how your business is achieving measured results. They can be utilized for every business industry. High-level KPIs may focus on the overall performance of your business, while low-level KPIs may focus on processes in departments such as sales, marketing, human resources, operations, support and others. At TGG, we use KPIs to track and show the performance of our client’s businesses so we can help them track what’s most important to their success.

Defining a KPI:

Key

Performance

Indicator

A KPI is a visual communication tool that’s represented using charts and graphs. It’s also a navigation tool that lets you know which way you can go with the business. KPIs are an indicator of the quality of performance. They should be looked at from an organizational level, division/department level, team level, all the way down to an individual level. By looking at them from each of these levels, the KPIs create accountability within a business. They also don’t just show one point in time, but trends and performance over time.

KPIs help narrow your focus down to the most important pieces of your business, so you can also use them to create action to propel your business forward. For example, client or employee retention may be your ideal KPI if you are in a service-based business where your people are your product. By having KPIs, you create the ability to review performance. Depending on your size, some businesses will have KPIs for every department. Regardless, the KPIs should all tie back together to give a holistic view of the business. Remember, if you can’t measure it, then it can’t be improved.

KPIs vs Metrics: What’s the difference?

KPIs focus on how effective a business is at achieving objectives, while metrics track business processes.

  • KPIs are action-based and create accountability. They are graphical measurements and act as your guidepost for driving you towards your desired targets, and often use data outside of your general ledger account balances
  • Financial metrics are important but may not drive the success of the business. They relate to numbers found directly in your financials and help support the KPIs. Your metrics should be looked at regularly, however they won’t drive future performance outcomes the way a KPI will.

While they are different, you will want KPIs and metrics both included in your monthly financials.

Financial Metrics and Non-Financial KPIs

While they always relate to your financials, KPIs can be non-financial. The best way to know that it’s a non-financial KPI is if you have to look somewhere outside your financials to find the information. For example, if you have an e-commerce company, a non-financial KPI you might consider tracking is average cart size, cart abandonment rate, or top items sold by channel. Non-financial KPIs are used to measure the activities in your business that you see as important to the achieving your goals and objectives.

Financial metrics on the other hand, are financial because they are based around information found in the income statement or balance sheet. For example, current ratio, gross profit margin, or days sales outstanding, etc. Whether you are tracking financial metrics or non-financial KPIs, they should always relate back to your goals and strategic plan for where you want to take the business.

Match Your KPIs to Your Goals:

Targets and goals can be assigned to the KPIs so you can easily see where you are going and what it will take to achieve your goals. To match your KPIs to your goals, follow these simple steps:

  1. Ask yourself what “success” looks like
    • What do you care about? Where do you want to go? What are your goals?
    • Your goals can be short-term (one-year from now) or long term (five-years from now)
    • When deciding on your goals, make sure they follow the SMART format. This means your goals are Specific, Measurable, Actionable, Realistic, and Timely. For example, I want to sell my business by December 31, 2025 for at least 5 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
  2. Create context around “success” by learning about the industry benchmarks and positioning.
  3. Identify root causes and levers that can move you closer towards success
    • Sales, project management, operations, human resources, etc.
  4. Determine who controls the levers
    • Is the KPI for your sales team, human resources, accounting team, etc?
  5. Create goals and accountability
    • KPIs without intention, action or accountability is just information.
    • Make the KPI someone’s responsibility and hold them accountable
    • Minimum performance is condition of employment on the low-end and incentives, bonuses and commission are rewarded on the high-end. Your A players will be motivated to earn those incentives and help drive your business forward.
  6. Avoid having too many KPIs
    • In today’s information age, it’s easy to find yourself wanting to track everything in your business or see everything as “the most important thing” because you have access to so much data. Make sure though that
    • your KPIs are a direct reflection of your most important targets and only focus on the most impactful areas of the business.

Why are KPIs Important?

KPIs are the ideal way to keep your teams aligned on the overall goals for your business. They give a realistic look at the true performance and health of the business so you can keep doing what’s working and reexamine what’s not. If you find you’re suddenly off track, you can simply see where you need to make adjustments. Another reason why KPIs are so important is that they hold your teams and people individually accountable. Everyone should feel that they are providing value in helping move the business along and closer to the overall goals. Since the KPIs are tracking the most important pieces of your business, it’s especially important to pay attention to the data so you know if you’re on track to meeting your goals or not.

Depending on your goals and what you want to accomplish in your business, your KPIs may shift as time goes on and that’s okay. Your KPIs will change as you either find the KPIs you’re tracking are no longer serving the business or there are new and better ones you want to track instead. At TGG, KPIs are a fundamental component of our TGG Way financial package where we track both financial and non-financial KPIs for our clients. Our KPIs are tailored specifically to your business’s industry and relate directly back to your overall goals. Check out our comprehensive list of KPIs by industry and follow our TGG Basic Business Model to benchmark your company today.

This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.

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