Definition of key performance indicators (KPI)


What are Key Performance Indicators (KPIs)?

Key Performance Indicators (KPIs) refer to a set of quantifiable measures used to assess the overall long-term performance of a business. KPIs specifically help determine the strategic, financial and operational achievements of a company, especially compared to those of other companies in the same industry.

Key points to remember

  • Key Performance Indicators (KPIs) measure a company’s success against a set of targets, goals, or industry peers.
  • KPIs can be financial, including net profit (or bottom line, gross profit margin), revenue minus some expenses, or the current ratio (liquidity and cash availability).
  • KPIs can also be more anecdotal, measuring foot traffic in a store, employee retention, repeat customers, and the quality of the customer experience, among others.

Key performance indicators (KPIs)

Understand key performance indicators (KPIs)

Also known as Key Success Indicators (KSIs), KPIs vary between companies and between industries, depending on performance criteria. For example, a software company striving for the fastest growing industry in its industry might consider year-over-year revenue growth (YOY) as its primary indicator of performance. Conversely, a retail chain may place more value on same-store sales, as the best KPI to gauge its growth.

Key Performance Indicators (KPIs) assess a company’s output against a set of targets, goals, or industry peers.

Types of key performance indicators (KPIs)

The main performance indicators related to finance generally focus on revenues and profit margins. Net profit, the most proven of the profit-based measures, represents the amount of income that remains, as profit for a given period, after taking into account all of the company’s expenses, taxes, and interest for the same period.

Calculated as a dollar amount, net profit should be converted to a percentage of income (called “net profit margin”), to be used in benchmarking. For example, if the standard net profit margin for a given industry is 50%, a new business in that space knows they must strive to meet or beat that number, if they are to remain competitively viable. . Gross profit margin, which measures revenue after taking into account expenses directly associated with producing goods for sale, is another common profit-based key performance indicator.

A financial KPI is known as a “current ratio” focuses largely on liquidity and can be calculated by dividing a company’s current assets by its current debts. A financially healthy business usually has enough cash on hand to meet its financial obligations for the current 12 month period. However, different industries depend on different amounts of debt financing, therefore, a company should only compare its current ratio to those of other companies in the same industry, to see how its cash flow ranks among its peers.

Special considerations

KPIs don’t have to be tied to financial data only. While profits and debt levels are indeed important key financial metrics, a company’s relationships with its customers and employees are no less important in establishing its overall health. Common non-financial KPIs include measures of foot traffic, employee turnover rates, number of repeat customers versus new customers, and various quality measures.

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