What Is KPI? How to Build Effective KPIs

Key Performance Indicator – Key Performance Indicator (KPI) is a numerical value showing whether your organization or company is achieving its stated goals. Teams and leaders use KPIs to evaluate the performance of the whole company's business processes and of individuals. Tracking KPIs helps you assess company performance and make data-based decisions on how to grow the company. Today Mona Media will walk you through what KPI is? Why KPIs matter and how to use them effectively. 

What is KPI?

Besides being called a performance indicator, KPI is also known as performance rate or business metric. You can find more definitions on Wikipedia or Investopedia. When starting an online business, the usual tasks are defining the organization's scale, drawing up a specific business plan, designing an introduction website for the business, setting up an office, recruiting staff, planning KPIs…

what KPI is

Some KPI examples:

• Profit margin
• Monthly recurring revenue
• Business operations
• Sales growth
• Expected value
• Operating schedule

Project procrastination is one of the reasons businesses struggle to reach their desired KPIs, especially without outside pressure. Watch the video to learn effective strategies for setting and achieving KPIs.

Benefits of applying KPIs at work

KPIs are evaluated in the business's overall ERP management system, and each department has different KPIs. This brings many benefits to the business. Specifically:

• Measure the work performance of individuals, organizations, departments and the business (helping managers measure and see how well their staff perform over a given period);
• KPIs motivate employees, because when they meet or exceed the company's KPIs they receive rewards that encourage them;
• KPIs help the company shape its goals and its vision for future growth;
• KPIs strongly influence the business's goals.

Types of KPI

Depending on the company's purpose and goals, you can set and track KPIs in different ways. Choosing the right KPIs from the start is essential to get useful information and a solid base for your company's operations. Each business unit should have its own KPI measures, since each has different tasks and purposes.

There are five main types of KPI:

• Business KPIs
• Financial KPIs
• Sales KPIs
• Marketing KPIs
• Project management KPIs

Business KPIs

Business KPIs help measure success against long-term business goals. By tracking business metrics, companies can navigate key business processes and spot areas of slow growth.

Common business KPI examples:

• Revenue growth rate
• Relative market share acquisition rate growth
• Profit share on equity

Driving growth with a business KPI strategy

Financial KPIs

Financial KPIs are usually monitored by the organization's leadership and finance department. Financial metrics show how well the company is doing at generating revenue and profit.

Financial KPI examples:

• MRR (Monthly Recurring Revenue)
• Profit margin
• Operating cash flow (OCF)
• Working capital
• Current ratio
• Budget variance

Sales KPIs

Sales KPIs are values used by sales teams to track their ability to reach key sales goals and objectives. Sales metrics help track monthly results and achieve sustainable revenue growth.

Some common sales KPIs:

• Monthly sales
• Customer conversion rate
• Cost per acquisition
• Sales qualified leads (SQL)
• Customer lifetime value (LTV)

Sales KPIs can be tracked on a sales dashboard.

Measuring revenue with sales KPIs

Marketing KPIs

The business's Marketing KPIs help marketing teams track their chances of success across all marketing channels, giving them a quick overview of marketing metrics that show how well the marketing team is doing at winning new potential customers.

Marketing KPI examples:

• Website visits
• Cost per acquisition
• Marketing qualified leads (MQL)
• Ad score
• Conversion rate

Project management KPIs

Project management KPIs are used by project managers to track project progress and the percentage of set goals achieved. Companies and organizations use these project metrics to identify projects likely to succeed and to meet requirements at key moments.

Common project management KPIs:

• Planned value (PV)
• Actual cost (AC)
• Earned value (EV)
• Cost variance (CV)
• Schedule variance (SV)

High-level KPIs and low-level KPIs

High-level KPIs show the company's overall performance. Examples include annual growth, annual recurring revenue (ARR) and customer market share. Individuals do not affect these metrics alone, since they result from teamwork across many departments.

Low-level KPIs show the performance of specific departments or individuals. Low-level business metrics are tied to each department's day-to-day work.

How to use KPIs

KPIs can be used to monitor your company's performance across all departments. Use a KPI dashboard and add your metrics to it for a quick overview of each key goal. A KPI dashboard is a real-time reporting tool that collects, groups, organizes and illustrates the company's key metrics. You can set up several KPI dashboards to track results for each department's goals. KPI management and calculation tools are often built into task and project management software.

KPI dashboard

The biggest value of a modern business dashboard is real-time information about a company's performance. As a result, business leaders and teams can make decisions based on real data instead of gut feeling. A comprehensive real-time business dashboard immediately shows problem areas and helps find solutions to critical issues.

Here are five essential questions everyone should answer before creating a KPI dashboard:

• What business result (goal) do I want?
• How can KPI values be improved through action?
• Do we have all the relevant data needed to track the KPI?
• Who will use the KPI report and what do they need to know (for example, which KPIs and measures should be included)?
• How will I visualize specific KPIs (charts, figures, diagrams…)?

Learn the process of building a KPI system

Building the KPI system by process helps the business run more smoothly and effectively. Each company, business and project has its own process and way of building KPIs, since it depends on each unit's purpose. Still, there is a common standard, a framework for the process of building a KPI system, along with the following factors:

Step 1: Decide who builds the KPIs

Departments build their own KPI systems: the functional departments can build the KPI system for the positions in their own department directly, guided and supported on method by specialists (the HR department or other experts).

• The KPI builder is the head of the department, who knows the tasks and requirements of each position in it best and most broadly. If a department is too large, KPIs should be built by lower-level managers.
• Advantages of this method: KPIs that departments build for themselves are highly feasible and clearly show each department's own function and tasks.
• Disadvantages of this method: it can lead to a lack of objectivity when building the KPI system, for example setting goals too low. So if you build KPIs this way, a panel of experts who understand the department's work should review and assess them.
• The KPI builder is the HR department or specialists: unlike the method above, this ensures objectivity and a scientific method. However, the KPI system produced may not match reality and may not show each department's real function and tasks. To fix this, the KPI system, once built, also needs feedback, review and assessment from the functional department.

Step 2: Clearly define each department's functions and tasks

To build a KPI system you must clearly define the functions and tasks of each department, project or individual. Each unit has different functions and tasks, so KPIs cannot be applied uniformly; they must follow the real nature of their work.

Step 3: Define job titles and the duties of each department

You need a clear, detailed description of each person's work, tied to the responsibilities of their job title. This is the foundation for building a KPI system that fits your business closely. Each person and department then has to carry out their own responsibilities to reach the goals that were set.

Step 4: Define the key performance indicators

Key KPIs are defined by the following criteria:

• Department KPIs: Based on the functions and duties of each department, the person responsible for building the KPI system sets common KPIs that describe the whole department. These KPIs are the basis for the KPIs of each individual position.
• KPIs for each job title
• Building the KPIs so that employees do their work as described and required. For this reason, KPIs are usually built from the main responsibilities of the job title above and from the KPIs of the department.
• KPIs must meet the SMART criteria and must come from a data source that the business already uses or will use in the near future.
• Evaluation period: The evaluation period is usually a month, a quarter or a year.

Step 5: Set a scoring scale for work results

Each indicator has different score levels, depending on how much of the work is completed and how well. Scores are usually split into 2 to 5 levels, each with its own number of points, based on the result achieved. More levels make performance reviews easier and more objective. Splitting the criteria and levels too finely, however, makes scoring harder.

The main reason KPIs exist is to lead a business to the business goals and strategy it has set. So you cannot focus only on what you want to measure and how, or on how to collect performance data, without saying what you are aiming for. This is the step where you state the business goal and also the result you want to reach within a fixed period of time. A good goal is:

• Specific, with a clear deadline
• Ambitious but achievable
• Based on good-quality information

Step 6: Measure, review and adjust

Measure the overall KPI results after the work period

Using the scoring scales above, managers or department heads add up the total score, draw conclusions and make adjustments where needed. Depending on the department and job title, managers adjust KPIs flexibly. A business can also bring in experienced consultants to work with its own staff to review results and set suitable KPI adjustments.

How to choose the right KPIs

To choose the right KPIs, you need to know your business goals. Every KPI you track must be measurable and tied to a specific goal. It is better to focus on a few key indicators than to spread across many unrelated figures, to monitor only the KPIs that matter to your organization, and to make sure every element of your business meets the SMART criteria:

SMART KPIs mean:

• Specific – Clearly defined
• Measurable – Can be measured
• Attainable – Achievable
• Relevant – Relevant to the goal
• Time-Bound – Has a deadline

KPI Smart

Remember that KPIs differ by industry, growth stage and project stage. Follow industry standards only when they fit your goals and expectations. Also remember that the metrics you track will change as your company grows and scales. Use the examples above to decide whether a KPI suits your business and your team.

Running a successful business is easier when KPIs give you an overview of where you stand. You understand historical trends, current progress and past problems better, and you can use that information to keep growth sustainable in the future.

Conclusion

KPI (Key Performance Indicator) is a measurable value that shows whether a team, organization or company is reaching the goals it has set. There are five main types of KPI: business, financial, sales, marketing and project management KPIs. KPIs are usually tracked with real-time reporting tools, also called KPI dashboards. Each of your KPIs must meet the SMART criteria, meaning specific, measurable, achievable, relevant and time-bound, and you should only track metrics tied to your organization and business goals.

If you also need HR management or KPI management software, you can get software advice from MONA by pressing the consultation button below or contact us on the hotline 1900 636 648.