How Key Performance Indicators Help Your Business

John Krautzel
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Key performance indicators are a vital part of business operations that give you a snapshot of how your business is doing at any particular time. Some KPIs, run monthly, show how much your company earned versus how much it spent. Other metrics indicate whether a sales team signed more deals or if customer service improved its interactions. The point of KPIs is to give your company the information it needs to bring in more profits.

What KPIs Measure

KPIs measure the goals set forth by leadership. Individuals, teams and the company as a whole work to meet the goals using quantifiable methods. For example, when a company wants to increase profits by 10 percent in one month, managers may determine the firm needs to add hours to employees, increase prices, reduce expenses or a combination of all three.

Computer software compiles statistics from various areas of the company to create visual representations of how a company performed throughout a specific period of time. A spreadsheet may show how much a restaurant sold during each hour of the day. A line graph could indicate the increase in sales during the past week. A pie chart might illustrate the many things that go into a company's expenses for one month.

The overall aim of KPIs is to give you an idea of how the firm needs to change to make its goals. You must interpret the information correctly so the business gets closer to meeting or exceeding the stated goals. As such, KPIs help improve several facets of your business.

Business Drivers

To effectively use KPIs, you need to know what drives your business. Do you rely on e-commerce interactions with online customers, or does your strength come from customers that order your products in bulk? KPIs help your company by quantifying the things important to your business model.

For instance, imagine that you need to finish making a new order for 5,000 items by the end of the week. Do your metrics indicate you should add more hours to a production line, or should you attempt to speed up the machines that help make the finished product? You do not want to increase hours too much. Otherwise, your profits on this order may decrease. However, you want to keep this customer coming back again if you deliver the goods on time.

Quality of the product also drives your metrics. Can you have the order of 5,000 items done more quickly without sacrificing quality? The company's goals answer these questions. Managers may determine that giving employees extra work may be the way to go as higher paychecks improve morale. On the other hand, finances may be tight during this particular month and your company may need to increase hours just a little bit while finishing the product run with a minimal amount of time to spare.

Thousands of KPIs come into play as your business tries to determine the correct course of action. How you interpret metrics within each department helps move your company towards its goals as a whole.

Marketing

The marketing department, for example, probably measures its sales leads, customer acquisition, response times and qualified leads. The overall number of leads is important, but some important KPIs measure how you convert each lead into an actual sale. How many customers visit your website and create a qualified lead? Suppose 100,000 people visit your website every month. You get 4,500 leads from that total. Your marketing team discovers that 250 of those 4,500 leads are actual people who may order items.

KPIs to take into consideration include how much time your marketing team spends trying to turn a qualified lead into an actual sale. Another metric to examine indicates how your website earns more business by creating solid sales leads from visitors. If you need to tweak the way visitors reach your website, you might need to increase your marketing budget to purchase more online advertisements to reach more people to get more clicks on your website. Once you get more clicks, you should determine how customers navigate your website so the firm creates more qualified leads from the visitors.

All of these types of KPIs help you turn a profit more efficiently. Because information, profits and customers change over time, your business must recognize changes in the statistics so you know how to move forward properly so your company remains viable.

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  • CATHERINE S.
    CATHERINE S. •

    What are the main key performance indicators for the health care industry, for example a hospital? Are they significantly different that those for a normal for-profit business? I work at a hospital and I believe that the same indicator models used for other companies could also be applied to not-for-profit organizations.

  • Nancy Anderson
    Nancy Anderson •

    @Mike as a manager you are going to be charged with doing both. You can still use the established KPIs for measuring your goals and achievements -making sure that your entire team is on the same page and moving forward while at the same time keeping the lines of communication open and getting to know your employees. KPIs should never consume all of your time. If they are, then you need to revisit them and make some changes.

  • Mike Van de Water
    Mike Van de Water •

    As a manager, how much of your time should be spent interpreting and using KPIs as opposed to doing it the "old-fashioned" way of getting to know your employees and understand their personal strengths and weaknesses? We see in baseball some teams go gung-ho about the sabermetric angle of the game and lose the "clubhouse chemistry" that is an important (but immeasurable) aspect of performing well. How do you make sure you don't lose that personal touch?

  • Jay Bowyer
    Jay Bowyer •

    Over time, we can use our companies' KPIs — quite apart from the data we used to create them in the first place — to discover how we contributed to past company successes. We can then hone the ways in which we use KPIs to craft future company policies, putting an even greater emphasis on success!

  • Hema Zahid
    Hema Zahid •

    KPIs definitely help a firm to increase their productivity levels. Managers don’t need to brainstorm ways to make the production line run faster if they have access to KPIs. All they need to do is analyze the data and make the necessary adjustments. I can see KPIs being just as helpful for small businesses as they are for large ones.

  • Jacqueline Parks
    Jacqueline Parks •

    @Duncan I have to disagree about telling teams about your use of KPIs. Although I value transparency, I would not want my teams overly worried about how management is interpreting KPI data. When using KPI information properly, many factors come into play. I would rather keep the focus on management using the data to make changes and encourage employees as necessary to improve weak areas.

  • Nancy Anderson
    Nancy Anderson •

    Thanks for the comments. @Abbey yes there are firms that can help a company set up their KPIs and help them to track them and modify them. Many companies rely on those KPIs to determine budget and manpower needs for the foreseeable future. KPIs certainly can be modified as time goes on. Maybe the initial indicator was too broad or even too narrow and needs to be divided into steps or maybe the issue needs more than one indicator to track it. Don't be afraid of these indicators. They are a great way to keep you on track.

  • Abbey Boyd
    Abbey Boyd •

    KPIs can be very important for an organization to be successful. I imagine not every company utilize KPIs, but of those that do, how do they manage the data? Are there firms that can be contracted to process KPIs? Especially with smaller companies, I think it might be hard to know what data to look at and how to analyze this information.

  • Duncan Maranga
    Duncan Maranga •

    With the KPIs in place, I think it is also of great importance to make it known to all involved parties, especially the in-team that includes sales representatives and departmental heads, that you are using the technique to track your performance. I believe team players will be more conscious of their input towards raising the performance index if they are aware of the specifics of evaluation at the end of each period.

  • Lydia K.
    Lydia K. •

    KPI's are computer generated. But I wonder whether managers can rely strictly on data interpretation to make changes that benefit for the company? For example, the article gives an example about marketing team data. Are there other factors that impact sales team lead conversion rates that aren't captured by KPI data?

  • Jane H.
    Jane H. •

    While I agree that KPIs are very helpful for gauging various aspects of a business in its marketplace, in my opinion it's very important to always prioritize employee satisfaction. If employee morale drops, everything about the company suffers. No amount of adjusting other factors will compensate for an adversarial internal atmosphere.

  • William Browning
    William Browning •

    You most certainly need to know how to interpret the data, otherwise your ROI on the KPI software is moot. How you put these numbers to use is the key behind KPIs. There are tons of great programs out there to measure how your company does, but you need to know how to use the tools effectively to take your business to the next level.

  • Shannon Philpott
    Shannon Philpott •

    Key performance indicators are helpful in identifying customer traffic and retention; however, a reliance on KPIs often leads to unsubstantiated assumptions that affect the viability of the employee base. For example, if a company is focused solely on numbers and does not account for variables, employees could be at risk of losing their jobs due to what appears to be low production rates.

  • Shaday Stewart
    Shaday Stewart •

    Does having broad goals make it difficult to use metrics effectively? It seems like many business owners would only benefit from quantifying their activities if their goals are specific and segmented. I know many SaaS companies that handle KPIs for companies use A/B testing and other trial-and-error methods to find out what drives success or problems, so maybe it's useful to start off with broad goals and use the initial implementation of performance metrics to evaluate and refine those goals.

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