What are KPIs and why do businesses need them

Author: Jason Daniels | Director | HFB

Performance objectives, often referred to as key performance indicators (KPIs), are fundamental components of any business strategy.

KPIs serve as benchmarks that gauge the critical factors driving your business, aligning with the strategic levers that can be adjusted to influence overall performance. Consistently meeting these KPIs propels the business towards achieving the objectives outlined in your strategic plan.

The initial step in leveraging KPIs is selecting the appropriate ones, followed by setting the specific targets you aim to reach. For instance, a manufacturing company might identify Gross Profit Margin (GP) as a KPI, with a target of achieving a 28.5% GP margin over the fiscal year. Other examples might include tracking Customer Retention Rate for a service-based business or measuring Conversion Rate for an e-commerce company.

It's crucial to frame these targets in a way that resonates with your team, ensuring they are clearly understood and inspire the necessary motivation to achieve the desired outcomes.

A practical method for evaluating your KPIs, targets, and business goals is by applying the SMART criteria:

Specific: Clearly define what you intend to achieve. Be precise about the objectives, specifying the what, where, how much, how, and with whom.

Measurable: Ensure that you can accurately track performance and progress toward your goal. Regular measurement keeps you aligned with the goals set in your strategic plan.

Achievable: While it's beneficial to set ambitious targets, they should remain within the realm of possibility. Unrealistic targets can be demoralizing. It’s important that goals and targets are mutually agreed upon by the team, so expectations are clear.

Relevant: Your KPIs and targets must be pertinent to the overarching goals of your business plan. There’s little value in measuring aspects that do not align with your strategic objectives.

Time-based and Timely: KPIs should be time-bound, with clear deadlines for achieving outcomes. Open-ended goals are ineffective. Performance should be measured regularly to ensure relevance and facilitate timely decision-making.