What is a Key Performance Indicator? Definition and Examples

![Key Performance Indicator.jpg](https://clockster-blog.storage.yandexcloud.net/Key_Performance_Indicator_73f68d53fc.jpg) Every employee in the business world realizes that the company is in charge of managing resources in order to get the greatest results, and KPI (key performance indicator) is one of the numerous measurement tools used by the management. What is a key performance indicator? KPI stands for Key Performance Indicator, which is a performance measurement tool used to assess business conditions in order to meet organizational targets. Management may use this tool to create strategies in order to increase organization performance. What are key performance indicators (KPIs), how do you establish them, and what are some examples? Take a look at the explanation below. ## What is a Key Performance Indicator? In short, KPI is a matrix that demonstrates how a company operates its operations in order to accomplish its strategic goals. The company may use this tool to track and assess employee productivity in accordance with the initial plan. Furthermore, KPI is an excellent tool for monitoring and improving employees’ performance. The KPI (Key Performance Indicator) gives the team an overview of performance goals, milestones, and insights to assist them in making choices. The KPI matrix could help a variety of departments, including finance, HR, and marketing. ### What is a Key Performance Indicator (KPI) according to experts? **Warren (2011)** KPIs are metrics that determine how well a business is carrying out its strategies. This involves determining whether or not the organization's plans have been interactively integrated. **Buoti and Banerjee (2012)** KPI is a performance evaluation used to attain the company’s objectives. Furthermore, KPIs may be utilized to identify market trends and as a foundation for decision making. ### Criteria for the KPI Matrix Not all evaluation matrices used in a company are called KPI. To be qualified as a KPI, the matrix must be based on specific objectives that need to be achieved in particular time. 'This month's sales objective' is an example of KPI indicators. ### Benefits of Key Performance Indicators The acronym KPI stands for Key Performance Indicators, and it aids teams in achieving the company’s objectives. Here are some of the reasons why KPIs are important for both organization and individual. ### For Businesses - Become a benchmark in the process of accomplishing the company’s objectives. - Measure and monitor employees’ performance. - As a parameter for rewarding and punishing systems.. ### For Employees - Ease the employees to understand the company's expectations. - Motivate the employees to achieve the objectives.. - Objectively evaluate employees’ performance. ## Types of KPIs KPIs appear to be classified into two types: financial KPIs and non-financial KPIs. ### Financial Key Performance Indicators This type of KPIs include any financial stuff such as cash flow, debt, net income, expenses, operational costs, and income. Here are some examples of financial KPIs. **Net Profit.** Calculates the amount of money remaining after subtracting the cost of products sold and other expenses such as interest and taxes from income. **Gross Profit Margin (GPM).** Determine the percentage value of gross profit divided by the company’s income. **Margin of Profit.** Calculate the percentage value of net income divided by the company’s income. **Current Ratio.** Calculate the financial performance of the liquidity balance (current liabilities) by dividing the current assets (liquidity balance) with the current liabilities. ### Non-financial KPIs Non-financial KPIs are those that have no direct impact on the company's finances. This usually has something to do with the company's operational or success. Here are some non-financial KPIs to consider. **KPI for Growth.** The indicators included here are the amount of visitors, customers, and business partners. **KPI for Online Service.** It contains indicators for providing 24-hour service. **KPI for Product Sales.** Indicators about the customer's goods delivery timelines. ## How to Create Key Performance Indicators Has your company implemented KPIs? Here are several method recommendations for developing KPIs. ### SMART KPI Indicator You may want to consider SMART indicators for your KPIs. The term SMART itselfI is an acronym for Specific, Measurable, Achievable, Relevant, and Timebound. **Specific.** A thorough explanation of what the key performance indicators are measuring and why it is essential. **Measurable.** It is measured using a scale standard. **Achievable.** The parameter points should be easily comprehended by the employees. **Relevant.** The parameter points must be consistent with the vision and goal of the business strategy. **Timebound.** Set a realistic deadline for reaching the achievements. ## How to Create Key Performance Indicators (KPIs) The steps for creating KPIs based on SMART indicators are shown below. ### Include clear targets. The performance indicators' objectives should be expressed explicitly. Setting defined goals is a crucial step in developing KPIs. For example, one of a hotel service company's KPIs is to improve its capacity to handle and resolve complaints. ### Outline the Objectives to be Achieved Outline a realistic target to be accomplished. That target would be used as a benchmark for measuring how far the adopted approach has progressed. It's better to focus on long-term goals. ### Gather the Data KPI indicators are quantitative. Therefore, it is important to collect reliable and concrete data to identify the real conditions of the strategy executed. ### KPI Formulas Some KPI indicators consist of only one statistic or metric. Customer satisfaction is an example of a single-measure KPI used by a company that provides services. However, some other companies employ a variety of methods that combine certain formulas. For example, productivity revenue is a KPI that requires certain formulas to calculate. ### The Way the KPIs is Presented Employees must be informed about Key Performance Indicators. The data may be translated into more understandable visual representations such as graphs and charts. Also, clarify how KPIs are calculated so that workers have a clear understanding on how to accomplish them. ## What are some key performance indicator’s examples? **The Example of KPI in a Service Company in Indonesia** ![Example of KPI in a Service Company in Indonesia.png](https://clockster-blog.storage.yandexcloud.net/Example_of_KPI_in_a_Service_Company_in_Indonesia_9cb068d8a6.png) Source: Pratama (2019) ![Example of KPI in a Service Company in Indonesia.jpg](https://clockster-blog.storage.yandexcloud.net/Example_of_KPI_in_a_Service_Company_in_Indonesia_c52a2eb81c.jpg) Source: RSUP Persahabatan (2015) **The Example of KPI in a Trading Company in Indonesia** ![Example of of KPI in a Trading Company.JPG](https://clockster-blog.storage.yandexcloud.net/Example_of_of_KPI_in_a_Trading_Company_8339a7383e.JPG) Source: Bahas Ekonomi - Ekonomi Indonesia Critical assessment standards are required to guarantee that the company's activities are going as planned, and KPI is what it is. KPI is a measurement matrix that uses interactive and integrated concepts to focus on the core goals. It allows a company to assess objectively the current condition of its business through the core goals. Above is the explanation of a company's KPI and the factors that influence it. If you want to learn more about business and its tips and tricks, check out other posts only on the Clockster blog!