A key performance indicator (KPI) is a measure used to reflect organisational success or progress in relation to a specified goal. The purpose of KPIs is to monitor progress towards accomplishing business objectives.
KPIs are typically included in a reporting scorecard or dashboard that enables management or other stakeholders to focus on the metrics deemed most critical to the success of an organisation.
On its own, each KPI will tell you only a small part about the health of your business, but used in combination they can paint a much more complete picture of your business. This information can then be used to improve your decision-making in the future.
Focusing on the right metrics
Not all metrics carry equal importance for every type of business, so it is important you think carefully about the metrics you want to measure. You need to consider:
- Your business size and location
- The industry you operate in
- Your stage in the business life cycle
- Your business goals
- The unique circumstances your business is in
To get the most value out of KPIs, you should focus on those that tell you something about the core areas of your business.
You might choose to measure:
- Gross profit margin – The percentage of revenue remaining after the cost of goods sold have been deducted.
- Net profit margin – The percentage of revenue remaining after all operating expenses (including tax) have been deducted.
- Debtor days – The average number of days it takes to receive payment from the invoices you issue.
- Client retention rates – The percentage of customers you have retained over a given period.
- Cost per acquisition – An online marketing metric that measures the cost to acquire one paying customer on each marketing campaign
- Return on investment – The profits made as a result of an investment as a percentage of the original cost.
- And many more besides…
Four key KPI groups
It is perhaps easier to split KPIs into groups to see how they can help you improve your business. Four key KPI groups include:
KPIs that focus on growth will tell you more about your growth rate in relation to revenue, and how your business wealth is improving in line with equity.
Efficiency KPIs will give you a better idea of the productivity of employees and how you can use your resources more effectively.
KPIs that relate to the financial health of the business will tell you whether you have enough assets to cover your liabilities, whether you’re holding too much stock or if your customers are taking too long to pay.
Resilience KPIs provide information about the level of financial risk in the company. This includes profitability and interest rate coverage, levels of credit risk and equity-to-asset levels.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out letsprosper.co.uk to learn more about how we can help your business.