What are KPIs and why are they important?

Whether you’re in business or not, you’ve probably heard of the term “KPI”.  Regardless of whether you’ve got a good understanding of what a KPI is or if the term is completely foreign to you, it’s still worthwhile thinking it through.  Put simply, KPI is an acronym for the words, Key Performance Indicator.

The term KPI is often thrown around in the business sense, but KPIs actually apply to every facet of life.  In a nutshell, a KPI is a series of measurements that provide information useful to determine how well someone is doing at something.  Let’s think about some examples:

  • If you want to get really healthy next year, KPIs for this might be your weight and how many hours sleep you get each day.
  • If you want to buy a house, KPIs for this might be the balance of your savings account and what the current home loan interest rates are.
  • If you want to improve your tennis game, KPIs for this might be your first serve % and what % of those points you end up winning.

Why are KPIs important?

They’re all about goals.  Once you’ve got a goal, a KPI will tell you how well you’re doing in achieving that goal.  This means that for each strategic choice you make, the KPI will help you measure whether that choice had a positive or negative effect on your progress towards that goal.

Why track KPIs?

There’s plenty of things in life you can measure.  Some involve numbers and some don’t.  There’s things that can be controlled (e.g. your weight, where you live, how good you are at tennis) and there’s things that can’t be controlled (e.g. the weather, the law, the economy).

Some things are outside your control, but it’s still helpful to predict them.  Take the weather, for example – you can’t change it, yet measuring and predicting it might help you to avoid getting stuck in the rain without an umbrella.  Some things can’t be measured at all.

On the flip side though, it’s not possible to control what you don’t measure.  You won’t have any control over where you live if you don’t monitor real estate listings, save up a deposit and do what’s needed to get finance.  You might by chance stumble upon somewhere nice to live, but to have control over the outcome you need to measure the right things.

KPIs for business?

A lot of business owners are good at what they do/create/produce, but they’re not always good at the business management side of things.  And who can blame them?  No one can be an expert at everything.

Business owners can literally track hundreds of different KPIs.  Some can be taken straight from the figures (e.g. sales, gross profit %, staff costs as a % of revenue) and some can’t (e.g. net promoter score, % of defective units, employee turnover rate).  So… what should the business owner be keeping their eye on?

Well, it really comes back to what the business owner’s goals are.  Someone who has just started a new business will have different priorities to someone planning for their retirement.  Once the business owner has identified what’s most important to them, they’re able to focus on the KPIs that are most relevant in tracking how well they’re progressing towards their goals.

Mastering KPIs

Effective use of KPIs involve more than just measuring things.  The end goal(s) needs to be identified, strategy needs to be planned out and then KPIs can be used to measure success.  This can be complicated!  A good business advisor will help business owners through this whole process to give them the best chance of achieving whatever they’re trying to do.

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