What are 'Key Performance Indicators - KPI'
Key performance indicators (KPI) are a set of quantifiable measures that a company uses to gauge its performance over time. These metrics are used to determine a company's progress in achieving its strategic and operational goals, and also to compare a company's finances and performance against other businesses within its industry.
BREAKING DOWN 'Key Performance Indicators - KPI'
KPIs, also referred to as key success indicators or KSIs, vary between companies and industries, depending on the pertinent priorities or performance criteria. For example, if a software company's goal is to have the fastest growth in its industry, its main performance indicator may be the measure of revenue growth year over year (YOY). In the retail industry, same-store sales is a common metric used to measure sales growth between different store locations.
Some of the most common KPIs revolve around revenue and profit margins. The most basic profit-based metric is net profit. Also known as the bottom line, net profit represents the amount of revenue that remains as profit for a given period after accounting for all the company's expenses, taxes and interest payments for the same period. Since net profit is calculated as a dollar amount, it must be converted into a percentage of revenue, or profit margin, to be used in comparative analysis. If the standard net profit margin for a given industry is 50%, for example, a new business in the industry knows it needs to work toward meeting or beating that figure to be competitive. The gross profit margin, which measures revenues after accounting for only those expenses directly associated with the production of goods for sale, is another common profit-based KPI.
The current ratio is a common financial KPI and is calculated by dividing a company's current assets by its current debts. A financially healthy company typically has more than enough cash and cash equivalents on hand to meet all its financial obligations for the current 12-month period. However, different industries use different amounts of debt financing, so comparing a company's current ratio to those of other businesses within the same industry is a good way to establish whether the business' cash flow is in line with industry standards. A company's financial KPIs are stated in its annual report.
Not all KPI metrics are related directly to a company's cash flow. A business' success depends on more than its balance of cash and debt; it depends on its relationship to its customers and employees. Some common nonfinancial KPIs include measures of foot traffic YOY or month over month, employee turnover, the number of repeat customers versus new customers, and various quality metrics. The specific metrics a company tracks are dictated by its current aims and may change over time as the business evolves, achieves old goals and sets new ones.