What are the five most important KPIs for your business?
Key Performance Indicators (KPIs) are essential tools for managing a business – or any part of a business – because they provide a high-level snapshot of vital parameters. KPIs, by definition, should be limited to things that are important, that is, information that summarizes performance in the most important facets of operations.
There are several generally accepted KPIs that most senior executives will watch, no matter what business they are in; things like sales and return on investment. Additional KPIs will reflect the nature and specific concerns of the particular business being measured. Return on assets, for example would be of more interest in an asset-heavy business like manufacturing or brick-and-mortar retail, but of little use for a services firm that is more dependent on payroll than physical assets.
Generally speaking, KPIs usually monitor overall performance in the key areas of the business: sales, operations (production), materials/procurement, and perhaps engineering/development.
Depending on the nature of the organization and its priorities, specific measurements can include customer measurements, such as new customer acquisition, customer attrition, sales by region/product line/segment, receivables/payments, or profitability by segment.
Operational KPIs might include productivity measurements, such as revenue per employee/ payroll hour/cost, units produced, or adherence to the master schedule, cycle time, or quality measures (rejects/scrap).
For many companies, inventory is a big concern, so a KPI that monitors inventory is important. Watching inventory level by itself is only marginally useful, however. Inventory turns (or days’ supply) is a much better measurement because it relates inventory to sales volume. But even that doesn’t tell the whole story. Companies have inventory to avoid shortages and, inventory reduction, while usually a good thing, can increase shortages. Some measure of availability such as service level or backorders completes the picture.
Moving down the organizational ladder, KPIs become more specific for the activities and concerns under the control of each department and manager. It is important that lower level measurements are a direct breakdown of higher level KPIs such that they can be ‘rolled-up’ into the highest level indicators. This keeps all segments of the business aligned to the overall company strategy.
So, what are the five most important KPIs for your business? That will depend on what business your company is in and what’s important for its success. To be sure, those top KPIs will include broad-based indicators of financial performance and operational performance. Ideally, a handful of KPIs (five or so is usually enough) will provide an overview of operations and finance that keeps senior management in touch with the state of the company, customers, sales, and operations.