Using key performance indicators is a great way for management to track goals. KPIs integrate numerous metrics from across an organization to analyze progress. However, KPIs should embody certain criteria to be useful and worth the effort in developing.
All KPIs should have an intended purpose that can be quantified. Even if the underlying achievement isn’t specific, the metrics that measure the initiative should be. For example, a company can strive to increase liquidity. By itself, this goal can’t be measured. However, a company can incorporate liquidity ratios such as the quick ratio. By integrating this ratio into the KPI report, a company can measure its progress toward achieving a higher level of liquidity through the calculation delivered in the KPI statistic.
All KPI metrics should also be linked to something that can be done. Reporting a KPI is only half the battle; it is the responsibility of management to observe the results, translate what the calculation means, and deliver action to make changes. For example, a goal of making customers happy does not have any associated actions. Instead, a goal of increasing customer satisfaction by increasing communication, decreasing wait times, and improving product quality is actionable. In addition, all three goals can be measured by KPIs.
Your KPI reports should create a historical timeline of what your company has been doing and the direction it is going. Referring to previous KPI reports is a great way to learn how your company has improved over time. In addition, you can check back on how goals have been achieved, the timeline in achieving those goals, and what initiatives didn’t quite work as expected. Following up on documented KPIs allows management to learn from previous goals and incorporate the successful concepts into future KPIs.
All KPIs should come with an established life. Goals should have a specified timeframe, and the KPIs reporting on these goals should align with the plan. If the goal is to grow your customer base by 30% by the end of the year, your metrics should incorporate the progress of the goal not only by percentage but also by date. Having achieved 20% growth is great, but if this metric is suddenly reported on the last day of the year, there is no time left to improve the metric. Therefore, integrate the number of days left with the target metric.
Businesses need to adapt to changing market conditions, so KPIs should never be fixed. Although it can be useful to report core financial information on a repetitive basis, it is also important to incorporate flexibility with reporting. Change the way the KPI is presented, or change what the KPI is tracking without changing the underlying goal. In addition, follow what is applicable to your business, and be prepared to change the goal based on what is going on in the company.