By: Matt Lane
When managing a business, it is essential to have benchmarking standards to evaluate the overall health and condition of the operation. The most common method of tracking benchmarks is establishing key performance indicators, also known as KPIs. KPIs are specific and quantifiable representations of benchmarks presented over a period of time. Simply put, they are a way for leaders to see if they’re progressing with their organizational goals and assisting with critical business decisions.
There are several types of KPIs that you can adopt in your business. Some KPIs are high-level, and others deal with front-line operations within an organization. The most common types of KPIs are: quantitative, qualitative, operational, strategic, leading, and lagging.
Types of KPI
Quantitative KPIs is any measurable characteristic that involve numbers. The quantitative KPI are the most common type of KPIs and covers many areas, such as customer retention rate, project profitability, issue resolution time, and revenue per employee. Qualitative KPIs involve a descriptive characteristic such as customer or employee satisfaction obtained through surveys. Operational KPIs evaluate the efficiency of day-to-day operations and typically vary depending on industry and product line. You would use a strategic KPI when navigating toward a long-term goal or initiative. Lastly, leading and lagging KPIs track specific performance over time. Leading KPIs rely on current performance and market trends as an expectation for future prediction, whereas lagging KPIs review trends associated with past performance. KPIs can be interlaced; for example, management may review employee satisfaction for the prior five years. This KPI is an example of a qualitative KPI combined with a lagging KPI.
When creating a set of KPIs to monitor, it is vital to start modestly. Identify one or two benchmarks that you view as essential. Operationally, you should review client growth and retention data month over month. From a financial perspective, gross revenue and gross profit margin are common among all businesses. In addition, workforce KPIs such as employee turnover rate and cost per employee can be valuable when evaluating headcount and hiring decisions. Below are a few suggestions to help you select the right KPIs to use for your business:
- Make sure your KPIs directly relate to a goal or expectation. If your goal is to boost gross revenue, look at things like marketing budget allocation and year-over-year revenue growth rates.
- Focus on a few key metrics. These should be related to benchmarks vital to you and the goals of your business. Once optimized, move on to incorporate a different set of KPIs.
- Look at your industry and competitors. If you have a similar business model, product, or service, it can be helpful to know how you’re performing comparatively.
KPIs are tools used to measure performance holistically and impartially. Using the data to have constructive conversations with your team is imperative. Teams should be mindful of the KPIs, what is being tracked, and how they are empowered to improve the metrics represented. Committing to implementing KPIs will give visibility into the health of your business and the progression of your organizational objectives.
Do you need help creating KPIs for your business? The Client Accounting & Advisory Service team at Suttle and Stalnaker, PLLC offer experience and expertise having partnered with businesses from various industries and sectors for fifty years. Our team can advise on trends and provide tools to help you focus on the crucial benchmarks associated with KPIs. Contact Steve Morgan, CPA, or your Suttle & Stalnaker representative to determine what KPIs are right for your business!