A key performance indicator (KPI) is a specific measure of an organization's performance in some area of its business. It is a very general concept, with different implementations depending on the type of business and goals of the organization. Examples may include such things as the percentage of deliveries made on time, total inventory at any given time, distribution costs as a percentage of total sales, accuracy of invoices sent to clients, or lead time for a product.
The purpose of KPIs is to give a business quantifiable measurements of things it has determined are important to its long-term success. Identifying the most important indicators is the first step towards realizing increased profitability and efficiency for most businesses. For these measurements to be useful, they must be consistently quantifiable, have an established correlation to the area of the business in need of improvement, and not give false readings.
For example, a massage company may notice that the bulk of its profits come from repeat customers to the same masseuse. They wish to move more of their business towards repeat customers and the steadier, long-term cash flow they represent. One of the most important KPIs for this company is therefore the number of repeat customers a masseuse gets. By tracking which customers request a masseuse by name and have been in before, they are able to accurately calculate this figure. They may then set a specific goal, such as 50% of customers being repeat business, and track how their employees meet this number. Employees that meet or exceed the target are rewarded, while employees that fall short are given further training in order to achieve the target.
KPIs may be differentiated in a number of ways. Directional ones, for example, give a simple better-or-worse rating for a specific area of a business and track whether or not business is improving. Quantifiable KPIs, on the other hand, are represented as a number and allow for more accurate analysis of the data. Even those that are not initially in numeric form may be translated into numbers. A user rating system of Poor, Fair, Good, and Excellent, for example, may be translated to a number scale of one to four.
It is also important to recognize whether these factors are within the ability of the business to affect or not. While it may be important to track such indicators as customer fall-off due to inflation, the active factor of inflation is not actionable for the company, and is therefore less important than a measurement that may be directly acted upon by the business.
Overall, KPIs offer an excellent opportunity for businesses to target specific areas of desired growth and achieve maximum results. Many banks and other lending institutions make data on these indicators available to borrowers to help them achieve greater profits, and many individuals find that it is worth looking into whether a lending institution offers this service.