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.

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Key Performance Indicators (KPI)

Understanding Key Performance Indicators (KPI)

KPI can also be referred to as key success indicators (KSI) and 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 key metric used to measure growth.

Key performance indicators (KPI) gauge a company's output against a set of targets, objectives, or industry peers.

Types of Key Performance Indicators (KPI)

Key performance indicators tied to the financials are usually focused on revenue and profit margins. One of the basic profit-based measurements is the net profit, also known as the bottom line. This number 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 net profit margin, to be used in comparative analysis. For example, if the standard net profit margin for a given industry is 50%, 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 financial KPI focused on liquidity 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. 

Special Considerations

KPI doesn't have to be tied the financials, as a business' success depends on more than its profits and debt levels. Its relationship with customers and employees are important as well.

Some common non-financial KPI includes measures of foot traffic, 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 and sets new performance measures.

Key Takeaways

  • Key performance indicators (KPI) measure a company's success versus a set of targets, objectives, or industry peers.
  • KPI can be financial, including net profit (or the bottom line, gross profit margin), revenues minus certain expenses, or the current ratio (liquidity and cash availability).
  • KPI can also be more anecdotal, measuring foot traffic in a store, employee retention, repeat customers, and quality of customer experience, among others.