How do you know if your business is doing what it is supposed to do? How do you know if you are doing well or not?
Sounds like an easy question to answer, doesn’t it. But for too many companies, it is not so black and white.
But it should be.
What Are Key Performance Indicators?
Key Performance Indicators (or KPIs) are the business-defining metrics that you will use to answer the questions posed above. And the only person that can tell you what those KPIs are, is you.
Each industry and each company might have different ones. You might have just one of you might have five. They might be focused solely on revenue or they might be focused on new customers.
Not Just Any Metric
The key is in the name – Key Performance Indicator. This is not just any metric. This is the one that gets right to the heart of success. If the metric is positive, you are doing well. If not, you have work to do.
A good test to decide whether a metric is truly a KPI is to think about a situation where said metric was moving in the right direction, and yet the company itself is moving in the wrong direction.
For example, let’s say you choose a new customer metric. Is it possible that you could be seeing strong growth in new customers, but at the same time see shrinking revenue? If so, than new customers alone is not a great KPI.
Can You Have Too Many KPIs?
Yes. Most businesses will have more than one. But it is important to limit it to as few as possible.
Why? Because the more metrics you have to look at to determine the overall health of your company, the more difficult it becomes. They don’t have to tell you what’s wrong when things are wrong, that’s what analysis is for.
A good rule of thumb is to keep it to 5 or fewer.
KPIs are the metrics that you use to answer the question, “how is the business doing?” They should be readily available and easy to understand and explain.