As your business operations, underlying trends, patterns, and results occur. For this reason, utilizing key performance indicators to minimize the information you look at will improve your company’s overall direction, planning and success.
A KPI report is generally formatted into a dashboard. This layout summarizes various aspects of the business in a concise manner. Certain items of the KPI dashboard can appear on every report, while others can be more sensitive based on current events. These metrics often tie to business goals, as KPI reports track the progress towards the achievements.
KPIs can be depicted in numerous ways. A KPI can be a numerical dollar amount, percentage change or calculated financial ratio.
A KPI can also be a visual representation of a metric. For example, statistics can be gathered on the percentage of sales returns from the past four years. By displaying the rates on a line graph, the change over time is represented in a different way from a financial statement. Accounting software typically has modules for financial statement preparation in addition to other modules for pulling custom reports.
Influence of Software
Software products are increasingly expanding their capabilities for displaying KPIs. KPIs are becoming more interactive; in the example above, a user can potentially click the previous year’s sales returns to be linked to a visual depictions of the number of returns per month.
Software makes KPI reporting versatile and customizable. KPI reports can be used by internal management for process improvements, shown to external investors for a high-level summary or used in marketing materials (for example, referencing a 95 percent customer satisfaction rate).
Examples of KPIs
KPIs generally fall into four groups: finances, processes, customers and employees.
- Financial KPIs include cash on hand, gross profit, or liquidity ratios like the current ratio.
- Process KPIs focus on operational efficiency by calculating inventory turnover, product waste or accounts receivable turnover metrics.
- Customer KPIs includes satisfaction rates, new customer growth or average wait time for phone questions.
- Employee KPIs include employee satisfaction rates and turnover rates.
These four groups come together to deliver a high-level view of how the company is operating as a whole.
How to Interpret Metrics
The overriding goal of KPIs is to convey statistical information to users in a way that is convenient and easy to understand. Therefore, each KPI report will be slightly different regarding its interpretation.
Visually, color-coding metrics is the easiest way to interpret data. For example, favorable statistics can be highlighted green, while unfavorable statistics can be highlighted in red. Symbols and conditional formatting can be utilized to establish these rules.
When analyzing KPIs, incorporate industry, competitor or historical data. For example, a current ratio of 4 does not indicate any positioning. If the industry average is 8, this KPI is worth investigating. In addition, if your current ratio was 6.5 last month, this data requires further investigation.