The Importance of KPIs for Performance and Business Forecasting
Measuring success and or progress is an activity that takes place daily. KPIs are basically key performance indicators to help a business determine performance on individual, departmental and strategic business unit level. Usage of KPIs for tasks such as business forecasting helps to provide the essential information in helping the individual, department and company steer towards the forecasted goals.
KPIs should not be used for rewarding or punishing team members, but rather as information tools to help make corrective steps in time to ensure that the goals can be reached within the proposed timeframe. KPIs must be aimed at improving accurate data usage for business decision making.
The KPI used should be carefully selected to indicate and monitor performance regarding strategic goals and key areas relevant to the success of a specific task or activity within the organisation and for the business as a whole. Such indicators help to make the objectives measurable and to improve control and insight regarding the performance of individuals, departments and the entire company.
What Does All KPIs Have in Common?
Any type of key performance indicator uses measurement, but we can distinguish between two main types of measurements. The comparative type is used with KPIs where the current situation is measured against the forecasted situation while the absolute measurement is used with KPIs to get a direct yes or no answer on whether the anticipated state has been achieved.
Types of KPIs
We can distinguish various types of KPIs, relevant to the functions within the company and that can be used for effective business forecasting. The first two types are that of leading and lagging KPIs. The leading KPI is used for the business forecasting of success or failure. Here the percentage of conversion can for instance, be measured. The lagging KPI is an indicator that shows success or failure after the fact and measures for instance, the money value of operating profits per division.
There are various other types of KPIs, such the input KPI representative of the resources used for the generation of the desired business results. It for instance, measures the Rand based cost per advertisement publishing whereas the process KPI measures the productivity of a specific process such as the percentage of products delivered on time.
One can also use outcome KPIs to measure the results of business activities as related to the benefits created while the output KPIs measure only the results of the activities. With quantitative KPIs the characteristics are measurable by means of numbers or averages and with the qualitative type the characteristic is descriptive and measurement is usually done through surveys. Finally, we can also distinguish between the industry and functional area KPIs with functional being related to the overall business capability and industry related to a specific operations line. Note that in many instances, you may need to use a combination of several types of KPIs for optimal measurement of performance.
KPIs must be carefully selected since not all indicators are critical to performance. In accounting you will for instance, use cost analysis, control, accounting systems, cash management, and transaction KPIs. When it comes to corporate services functions, KPIs such as administration, facilities, travel and legal services will be relevant.
What makes for a good KPI?
Effective business forecasting is only possible if the KPIs selected are relevant to the specific organisation or department’s goals and objectives. It is essential to be able to clearly define the KPI as this will play an important role in consistency of data collection and comparisons. The KPI must be easy to use and as such abstract terms should be avoided. It is almost obvious, but the KPI must be verifiable and comparable. It should also be responsive, attributable and cost-effective, timely and statistically valid.
What We Can Do for Your Company
We help businesses to identify and select KPIs that meet the above requirements and to automate them on the level required, including individual, departmental and organisational.
We offer training through workshops to help you learn how to select and apply KPIs, and assist you through the creation of dashboards using sophisticated software to analyse business processes and to use the data collected for informed business decision making. For more information, please feel free to contact our team at KPI Management Solutions.