Measure performance and set targets

Key performance indicators (KPIs) help measure and evaluate the effectiveness of solutions, functions and processes in your business. They align with your strategic goals and measure performance against specific targets, helping you to determine if you're likely to achieve your business objectives.

Types of KPIs

Many types of KPIs exist, focusing on objectives like:

• improving revenue
• reducing costs
• increasing efficiency
• improving customer satisfaction

Fundamental KPIs for most businesses typically fall under several key areas:

• sales - eg sales revenue, growth rate, customer loss, inventory turnover
• marketing - eg customer acquisition costs or retention rates
• finance - eg net income, profit margins, working capital
• human resources - eg employee turnover and training spend

Many other business metrics could be vital to improving company performance. You should choose the ones that make the most sense for your business and strategy.

Examples of KPIs

Common business metrics include:

• average time to complete a task
• percentage of tasks overdue/completed on time
• cost of service delivery
• downtime and availability
• customer complaints received
• volume of tasks per staff
• customer ratings of service
• number of process errors
• return on investment
• debt-equity ratio
• operating margin
• revenue per employee
• employee satisfaction index
• order fulfilment cycle time
• production yield
• customer satisfaction index
• customer acquisition cost

None of these KPIs is necessarily better than the other. The challenge is finding the specific measures that will help you improve your business performance.

For example, a manufacturer producing low-cost goods in high volumes might measure production line speed, while another focusing on high-cost components might prioritise reducing production errors instead. A service provider may develop measures around customer service.

You can download our KPI assessment template (DOC, 18K) to help you evaluate the effectiveness of your KPIs.

Your KPIs should relate to aspects of the business environment over which you have control. For example, setting the Bank of England base rate as a KPI would be pointless because you have no power to change it. However, you can control your business's exposure to fluctuations in interest rates, making this a potentially useful KPI.

Importance of KPIs in business

KPIs drive performance improvements by enabling you to:

• spot potential problems or opportunities
• set targets for business and staff that will deliver your strategic goals

Find out how to set business performance targets.

How to measure KPIs?

After defining which KPIs are most relevant to your business, determine the best methods to measure and assess them. It can help to break down the assessment into more manageable components and measure each separately. You must monitor KPIs regularly for them to be effective. Computer-based management information systems are available to help you accurately measure and report on your KPIs.