What are KPIs?
KPI Stands for Key Performance Indicators. They are designed to help assess whether a business is on track to meeting its objectives. KPIs can be financial such as growth in revenue or profit margin . They can also be non-financial such as number of sales units, conversion rate of leads per sale or average price of the products sold.
KPIs like any goal should be SMART; that is Specific, Measurable, Achievable, Realistic, and Timely. KPIs are essential to all businesses small and large to help you understand your business’ current outlook, plan for the future and track your progress towards reaching goals.
What are metrics?
Metrics are measurable values that are meaningful to a business for analysing trends, monitoring performance and ultimately achieve goals. Metrics can be financial ones that would be typically found on financial statements such as sales revenue and profit. They can also be non-financial such as customer retention or sales units.
Metrics are important because information is power and the more information you have at your fingertips, the better equipped you are to be able to identify trends, analyse data and make informed business decisions. Metrics can be used to form and then measure KPI targets.
Let’s run through a scenario to highlight the power of KPIs and metrics.
Let’s take the example of a fictitious paper company Dunder Mifflin. Paper sales were up in the month, higher than ever and exceeding budget. Sales people Dwight and Jim celebrated their monthly bonuses. However, when the regional manager Michael reviewed the financial statements, the profit had not increased in line with paper sales, in fact, the monthly results didn’t even achieve budget.
In seeking to understand why an increase in sales had not increased profit, Michael consults their dashboard reporting tool which has all the company metrics. He notices that discounts offered to customers had increased significantly as well as the commissions bonuses paid to the sales staff. These factors had essentially increased expenses and were the main contributing factors in the decrease in profit despite the increase in paper sales.
Michael shakes his head and implements new KPIs to ensure these occurrences are monitored. He makes two new business decisions:
- New KPI ‘average fee’ which uses the metrics ‘revenue’ divided by ‘sales units’; so that if heavy discounting by sales staff ever happens again, it can be monitored closely. Michael also sets a target for average fee so that if average fee falls below an acceptable target, it would be easily highlighted.
- A new commission structure for the sales staff that ensures sales staff must meet the average fee target to claim their bonuses. Commissions will no longer be based solely on just sales units.
Using metrics Michael was able to problem solve and identify the cause of low profit. He was then able to make an informed business decision and set a new KPI target to monitor the effect of the new business decision. This is the value of dashboard reporting with KPI and metric data.
Explore the potential of KPI and metrics information for your business with the Trendsight team. Book a free discovery call to learn more.