A Key Performance Indicator (KPI) is a tool used by companies to measure business performance. The success of the critical aspects of a company can be measured using a KPI. By focusing on one particular element of a business that’s critical to its success, like quality, the company’s performance may be improved.
What is a KPI?
In order to achieve the goals and objectives set by a business, KPIs or measures will be put in place. A KPI may be given to individuals or departments of a company, or both, in order to make sure that objectives are reached. For instance, a company that receives postal correspondence may want to set a KPI that requires 90% of all letters to be answered within five days.
SMART
A Key Performance Indicator has to be meaningful and effective, which is why they should be SMART – Specific, Measurable, Agreed, Realistic and Time Related.
A KPI that’s ‘specific’ is one that is clearly set out and understood by key stakeholders. You must be able to measure progress towards achieving company objectives. The goals of a business must be agreed by all key stakeholders, like the employees and the company owner. Be careful to set objectives that are clearly achievable, making sure you have sufficient resources to reach your goals. Time is a crucial factor, as you must have sufficient time to reach the objectives.
Measuring progress
Results may be measured in terms of productivity, levels of sales, margins, and profits. Once a KPI has been agreed with all parties, management should discuss results on a regular basis so that you can see whether you are on target to achieving your goals, and what may be preventing you from doing so. A management accounting service may take on this role, so that any problems can be resolved. This is sometimes referred to as continuous improvement.
Monitoring of a KPI can be done over various timescales. Some companies prefer to monitor performance over a weekly period, when the results can be discussed. Other organisations may prefer to consult every month. Whatever the time period is, it is likely that not achieving the desired outcomes will be discussed, so that improvements may be put in place. Specific problems may be making it difficult to reach objectives, which will be highlighted by the KPIs. As problems are tackled, the results will improve.
To discuss how to set a relevant KPI for your organisation, why not contact us for an informal discussion?