27th November 2019

KPI – What Is a KPI And Why Are They Important?

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There is a familiar phrase in business circles which goes something on the line of ‘If it can be measured, it can be managed.’ A KPI is a Key Performance Indicator and it is essentially a measurement of an activity within the business. The objective behind the recording of KPIs is to monitor the outcome of specific activities or events within the business. An obvious example would be monthly sales revenue, but it could be literally anything that is important to the business, such as:

  • Number of customer complaints
  • Hours worked by staff
  • Number of defects in a manufacturing process
  • Percentage of clients retained year on year
  • Growth in profit against target

Note that KPIs don’t have to be financial, but they do have to be ‘key’, ie there’s no point in wasting time measuring for measuring’s sake. In addition, for a KPI to be effective it not only has to be measured but the data has to be interpreted in some way. 

Take customer complaints, for example. If the number is increasing month on month, it could be symptomatic of a problem within the business, such as poor customer service or a faulty product. Or it could simply be that customer numbers are increasing, so the likelihood of complaints increases in line with this growth. What is needed is the raw data plus interpretation, and if necessary corrective action.

On the financial side, measuring sales performance is a useful KPI. Month-on-month increases could indicate a healthy business improvement. However, sales revenues on their own aren’t the complete picture; if sales are increasing but profit is decreasing – ie margins are falling – then this could be a sign of trouble ahead. Similarly, increasing turnover at the expense of poor cash collection can also lead to problems further down the line.

Financial KPIs could include

  • Monthly sales £, for each line/service
  • Monthly sales volume, for each line/service
  • Profit margin, for each line/service
  • Days taken to collect cash
  • Days in overdraft
  • Stock levels – this could be for raw materials, goods for resale or work in progress

KPIs should be measured for every aspect of the business and right the way through the entire process:

  • from winning a new customer to collecting cash and making sure they keep coming back
  • from the purchase of goods and services that ensure your products are delivered exactly as they should be
  • for the hiring and retention of productive staff
  • for managing the company finances

Confused about KPIs? New to business and still learning the ropes? Follow our Business Fundamentals blogs and get up to speed each month!

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