Key Performance Indicators - KPI

Loading the player...

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.

Financial KPIs

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.

Nonfinancial KPIs

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.

RELATED TERMS
  1. Metrics

    A wide variety of tools that managers and executives can use ...
  2. Asset Performance

    A business's ability to take productive resources and manage ...
  3. Strategic Joint Venture

    A business agreement between two different companies to work ...
  4. Operating Cash Flow Demand - OCFD

    A measure of the amount of operating cash flow needed to meet ...
  5. Financial Performance

    A subjective measure of how well a firm can use assets from its ...
  6. Performance Shares

    In the case of stock compensation, shares of company stock given ...
Related Articles
  1. Professionals

    What are KPIs?

    Key performance indicators (KPI) measure success in attaining predetermined goals.
  2. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  3. Entrepreneurship

    Implementing A Small Business Social Media Strategy: Define Your Goals

    The first step in creating a social media strategy for your small business is to define your goals.
  4. Economics

    Explaining Strategic Alliances

    A strategic alliance is a business relationship between two or more entities that share recourses for a common goal.
  5. Define Your Investment Goals & Objectives

    If you build a house without a plan, what sort of results would you expect? Investing isn’t any different. Without goals – and a well-thought-out plan for meeting those goals – ...
  6. Investing Basics

    Goals For Novice Traders

    You're starting out in the investing world as a trader, so now what? We give you a few tips on how set your goals.
  7. Economics

    Explaining Industry

    The term industry refers to a classification of companies that share similar business activities.
  8. Options & Futures

    10 Simple Steps To Financial Security Before 30

    Find out how to reach your long-term goals without becoming a tightwad.
  9. Options & Futures

    Enjoy Life Now And Still Save For Later

    Find out how to balance living well today and retiring well tomorrow.
  10. Economics

    Understanding Management by Objectives

    Management by objectives is a process in which a manager and an employee agree on specific performance goals and then develop a plan to reach those goals.
RELATED FAQS
  1. Which key performance indicators (KPIs) indicate that a business is successfully ...

    Understand the importance of key performance indicators in helping a company follow its chosen strategy and achieve its corporate ... Read Answer >>
  2. Can the Herfindahl-Hirschman Index be used to determine competitive balance in professional ...

    Understand what types of key performance indicators can be measured more than once a month and what indicators should be ... Read Answer >>
  3. How can key performance metrics (KPIs) help evaluate employees?

    Discover how key performance indicators can be used to evaluate employee performance around goals which support organizational ... Read Answer >>
  4. Which KPIs (key performance metrics) should I use if I want to attract new customers?

    Learn about some the key performance indicators (KPIs) that companies can most profitably utilize to enhance their effectiveness ... Read Answer >>
  5. How does a company decide which key performance indicators (KPIs) to use?

    Setting specific and actionable key performance indicators gives companies the ability to track the success and health of ... Read Answer >>
  6. What are the most commonly used key performance metrics (KPIs) for small business ...

    Learn the most commonly used key performance indicators (KPIs) in small business management to determine the success of business ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center