What is KPI, How is it Calculated?

Key performance indicators (KPIs) measure a company’s success against a set of goals, objectives or industry peers.

Customer-focused KPIs generally focus on productivity per customer, customer satisfaction, and customer retention. Process-oriented KPIs aim to measure and monitor operational performance across the organization. Generally speaking, businesses measure and track KPIs through business analytics software and reporting tools.

What are Key Performance Indicators (KPI)?

Key Performance Indicators (KPIs) are a set of measurable metrics used to measure a company’s overall long-term performance.

KPIs help identify a company’s strategic, financial and operational successes, especially when compared to other businesses in the same industry.

KPIs, also called Key Indicators of Success (KSIs), differ between companies and industries based on performance criteria.

For example, a software company trying to achieve the fastest growth in its industry might consider year-over-year (YOY) revenue growth as its key performance indicator. Conversely, a retail chain may place greater value on same-store sales as the best KPI measure to measure its growth.

Key performance indicators (KPIs) measure a company’s output against a set of goals, objectives or industry peers.

Types of Key Performance Indicators (KPIs)

Financial Metrics

Key performance indicators linked to financials often focus on revenue and profit margins. Net profit, the most tried-and-true of the profit-based measures, represents the amount of revenue the company has as profit for a given period after accounting for all expenses, taxes, and interest payments for the same period.

Net profit, calculated as a dollar amount, must be converted into a percentage of revenue (known as the “net profit margin”) for use in the comparative analysis.

For example, if the standard net profit margin for a given industry is 50%, a new business in that space knows that if it is to stay competitive, it has to work to meet or beat that figure. Gross margin, which measures revenue after accounting for expenses directly related to the production of goods for sale, is another common profit-based KPI.

A financial KPI known as the “current ratio” focuses heavily on liquidity and can be calculated by dividing a company’s current assets by its current liabilities.

A financially sound company usually has sufficient cash on hand to meet its financial obligations for the current 12-month period. However, different industries rely on different amounts of debt financing, so a company should only compare its current ratio with that of other businesses in the same industry to determine how cash flow accumulates among its peers.

Customer Metrics

Customer-focused KPIs generally focus on productivity per customer, customer satisfaction, and customer retention.

Customer lifetime value (CLV) represents the total amount of money a customer is expected to spend on your products over their entire business relationship.

Cost of Customer Acquisition (CAC), by comparison, represents the total cost of sales and marketing required to acquire a new customer. Businesses can measure the effectiveness of their customer acquisition efforts by comparing CAC to CLV.

Process Performance Metrics

Process metrics aim to measure and monitor operational performance across the organization.

For example, businesses can measure the percentage of defective products by dividing the number of defective products by the total products manufactured. Naturally, the goal would be to bring this number as low as possible.

Productivity time represents the total time required to run a given process. For example, a drive-thru restaurant efficiency can measure how long it takes to serve the average customer; from the time they place their order to the time they walk away with their food.

Examples of Key Performance Indicators (KPIs)

Let’s take a look at electric vehicle manufacturer Tesla (TSLA) for a few real-life KPI examples. All of these figures are for the first quarter of 2021;

Vehicle Production

During the quarter, Tesla produced 180,338 vehicles and delivered approximately 185,000 vehicles. Production is a big deal for the company because it has been consistently criticized for being bad at acceleration.

Increased production scale means more market share and profits for Tesla.

Automotive Gross Margin

For the quarter, Tesla’s automotive gross margin increased one percentage point to 26.5%. Gross margin is one of the best profitability measures for Tesla as it isolates vehicle production costs.

Tesla managed to increase its gross margin in the first quarter, even though sales of low-priced models outpaced high-margin models.

free cash flow

Tesla’s free cash flow was $293 million during the quarter. This represents a huge improvement from the $895 million loss of free cash flow in the previous year.

Tesla’s current generation of free cash flow shows the company has reached a scale of profitability without the help of regulatory loans.

Limitations of Using Key Performance Indicators (KPIs)

Some disadvantages of using KPIs are:

• Long timeframe for KPIs to provide meaningful data
• They require constant monitoring and close follow-up to be useful.
• Quality tends to decline when managers focus too much on productivity KPIs

What is a KPI Example?

One of the most basic examples of KPI is Revenue Per Customer (RPC). For example, if you generate $100,000 in annual revenue and you have 100 customers, your RPC is $1,000.

What are 5 Key Performance Indicators?

KPIs vary from business to business. But overall, five of the most commonly used KPIs are:

• Income increase
• revenue per customer
• Profit margin
• Customer retention rate
• Customer happiness

How Do You Measure KPIs?

It depends on the actual KPI being measured. But generally speaking, businesses measure and track KPIs through business analytics software and reporting tools.

What Is a Good KPI?

A good KPI has the following characteristics:

• Provides objective and clear information on progress towards an end goal
• Monitors and measures factors such as efficiency, quality, timeliness and performance
• Provides a way to measure performance over time
• Helps make more informed decisions

How Do I Create a KPI Report?

Steps to create a KPI report:

• Create an overview or introduction
• Clearly define KPIs
• Present your KPIs using appropriate graphs, charts and tables
• Make final edits to the report and distribute it