Key Performance Indicators (KPIs)
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Key Performance Indicator (KPI) Definition
KPI is an acronym for Key Performance Indicator.
A key performance indicator is a way of measuring a core business metric. KPIs are used to cut through the noise. Despite having an intimidating name, KPIs can be simple.
Before diving in, let's take a step back and understand each letter in the acronym K-P-I. Let's start with indicator. An indicator is something that shows the state of another item.
For example, there are pH indicator dyes that are used by scientists to access the pH levels in certain chemicals. The fact that the color changes in this dye in a predictable way allows us to quickly and safely understand the pH levels of different chemicals.
Now let's focus on "P" – performance. Performance refers to the the level of accomplishment or function, things can be high performance (working well) or low performance (not working well). Now we're left with the "K" – key. We can very easily become lost in the data, so it's important to pull out the critical information only.
This is where "key" comes in.
As a result, you can think of a key performance indicator as a simple statistic, number, or test to show us the function of something we want to measure. For example, a KPI for a digital marketing department could be the number of people who download an app, while a sales department may care about how many deals are closed a month.
What is a Key Performance Indicator (KPI)?
According to KPI.org, KPIs create "an analytical basis for decision making" and "help focus attention". Let's expand on these two points.
A KPI is only helpful when it is frequently measured and used in business decision-making. We can think of KPIs as a replacement for gut feeling or weak opinions. Moreover, a KPI is helpful specifically because of what they exclude: They only focus on important metrics.
A key performance indicator dashboard, then, can serve as a powerful tool for managers, executives, and business owners.
Humans have a finite attention span, especially when it comes to numbers. You do not want your KPI dashboard to have hundreds of detailed metrics. Instead, we want to measure a small number of key metrics that drive business results.
For example, website visitors might be an important metric to understand but can we do better? Should we optimize for number of "Buy Now" clicks or how many people have joined our email newsletter?
Which Business KPIs to Measure?
There are thousands and thousands of items that could be tracked in any given business. Deciding which metrics and key performance indicators to track is a crucial step, because this provides the filter that you evaluate your business through.
Here are the factors to consider when selecting KPIs: industry, product offering, company size, sales and marketing cycle, and more.
Examples of KPIs based on industry:
- Free Mobile App: App Downloads, New User Sign Ups, Engagement after 30 Days, Engagement after 90 Days
- Business Software: Free Trial Users, Number of Paid Users, Customer Retention, Marketing Cost to Acquire 1 User
- Retail Store: Monthly Revenue, Payroll Costs, Inventory Turnover, Accounts Receivable (AR), Accounts Payable (AP)
- Book Store: Monthly Revenue, Top 5 Best Seller, Inventory Levels, Cash Balance
When evaluating KPIs for your business or organization, consider which point has the most leverage. Simply put: What 1 objective would provide the largest impact?
If you operate a book store, you may have any number of problems. These problems could relate to anything from book selection and financial health to employee morale.
For a book store, that 1 metric might be number of books sold a month. There are only two ways to increase number of books sold: to increase the amount of people who come to your store or have each customer purchase more books per visit.
Increasing your revenue leads to having more resources, including a larger marketing budget or increasing wages.
This single KPI helps clarify everyone's job. From the front desk to the owner, there is an alignment between the KPI (increase book sales) and the day-to-day actions (offer better customer care, provide discounts for multiple purchases, and so on).
Put differently, a KPI is a single number that has strategic value to your business.
Create Your First KPI
When creating your first KPI, consider information you find yourself struggling to find. The value of a KPI comes from its ability to cut through the noise and provide a single number or a single metric to review.
Here is a list of questions to ask yourself when developing KPIs:
- What is the most relevant information I need to run my organization?
- Is this information easy enough to understand in 15 seconds?
- Can I explain this metric/data point to another person in less than 1 minute?
- If I know this metric is too low or too high, can I create a plan of action to improve?
For most businesses, we recommend looking at 3 KPIs to start with:
- Total Revenue: A month-by-month view of all revenue
- Total Expenses: A month-by-month view of all expenses
- Cash Balance: A real-time view of your bank account balance(s)
Evaluating these 3 KPIs will provide valuable insights and open the door to more detailed KPIs. This system allows you to track sales activities (increase revenue), cost reduction initiatives (decrease expenses), and efficiency improvements (increase cash balance).
Organizations can also use software to visualize this data in a number of different chart types, ranging from bar charts to line and area charts.
Create KPI Dashboard
KPI dashboards help executives and team leaders stay organzied. A well thought out KPI dashboard puts all relevant metrics together, so you can drive tangible results.
Just like with KPI charts, there are a set of questions you want to ask yourself when creating 1 or more KPI dashboards:
- What information would you like to bring together?
- Should this data be shown side-by-side or on separate dashboards?
- Who is the audience for this dashboard? Will they understand these metrics?
Included in every Alluxo account, users get access to one dashboard for free forever. Let's discuss what information should be on this dashboard.
When creating your first KPI dashboard, consider what data management needs to make informed decisions, including revenue, expenses, cash in the bank, growth rates, and inventory levels.
If you find yourself saying, "I need to know revenue, and revenue by region, and revenue by sales rep", you may be going too far into the weeds.
Similarly, make sure that all of the data on your dashboard works together to create a cohesive picture. There are few people who understand the details of both financial metrics and marketing metrics. Instead, stay focused at the summary level for your one dashboard.
We like creating 1 summary report (3-6 metrics), then build out dedicated dashboards for each metric. This breakout section is where you can elaborate on how your sales productivity leads to your final revenue number.
Example of Business KPIs
Businesses of all sizes have unprecedented access to data. Every website visit, button click, ecommerce checkout, and credit card swipe is an interaction that generates data.
Given how much data is being produced, businesses struggle to go from business data to actionable insights.
Alluxo helps businesses create, track, and manage their key performance indicators (KPIs) with ease. No code, data analysts, or complicated software here.
We often hear that business managers and owners do not have the time to create KPIs.
Thankfully, if you use QuickBooks Online, Alluxo comes with everything you need out-of-the-box to create and track key performance indicators. Our pre-built QuickBooks connector means that you can get up and running in minutes!
Our QuickBooks connector provides you with the ability to make custom views into revenue, expenses, current assets, and current liabilities. Moreover, our charts automatically update – so you're not spending time every week making sure your numbers are correct.
View KPIs from Anywhere
Great, now you have created KPIs and built your first KPI dashboard. What now? Well, Alluxo makes it seamless to track and manage KPIs from anywhere.
Whether you're on your computer, laptop, tablet, or smartphone, there is an Alluxo app to help you. You can even pull up Alluxo on your office or conference room TV!
Access the Alluxo web app from your desktop or laptop computer, whether at home or at the office. There is no software to download, install, or update!
For those people on the go, check out the free Alluxo mobile apps – available in the Google Play Store and Apple App Store today!
Want to access key performance indicators from somewhere else? Write us a message and we'll get right back to you! Custom KPI solutions are available upon request.