Part of managing a healthy business means encouraging employee productivity and closely monitoring your company’s performance. As the company leader, you need to delegate and lead the vision and strategy for the business. You also need an easy way to keep tabs on your company’s performance and track whether your employees are spending their time on the right tasks. How do you do that efficiently and effectively? The best way is by establishing and using key performance indicators, or KPIs.
Why they’re valuable
A KPI is a way to measure how well an employee, department, or business unit is performing toward a larger business goal. Done right, KPIs focus workers and managers on the activities necessary to reach the goals. They give you a quick way to check whether you’re hitting your goals or need to recalibrate.
They also help you delegate. KPIs focus each person on the activities that matter most and make it evident when some activity isn’t working well. Now there’s more consistency across your business, you avoid micromanagement, and can scale up the company by leveraging your knowledge across the leadership team.
Types of KPIs
There are literally hundreds of types of KPIs used in business, The ones that make the most sense for your company will depend on your industry, operations, and goals. Most companies already use KPIs to measure their sales team’s performance, but here are just a few examples of KPIs that might be useful for other parts of a business:
Marketing: cost per lead
Dividing total marketing cost by the number of leads generated gives you an overall cost per lead. It may also be useful to measure cost per lead by specific advertising medium, such as Google, Facebook, or direct mail. This will show you which medium is giving you the best ROI.
Operations: order fulfillment cycle
This is simply the number of days and hours between the time a customer places an order and when it’s delivered. A faster fulfillment cycle can generate cost savings and a better customer experience.
Manufacturing: first-pass yield
This is the percentage of units that complete a process step without defect or rework. In a multi-step manufacturing process, this KPI indicates which steps need attention.
Accounts receivable: days sales outstanding (DSO)
This tracks customer payment promptness as follows –the average account receivable divided by total sales multiplied by number of days in the measurement period. DSO can be measured monthly, annually, or any period in between.
A helpful way to look at KPIs is to think of them as the numbers behind the numbers. For example, sales and profits are the results, but KPIs track the individual activities driving those results – such as more leads, higher close rates, fewer defects, and faster collections.
How to use KPIs effectively
In a world where everyone has too much to do, KPIs answer this question: What are the top activities that have the greatest impact on our overall business success? The beauty of this concept is that you can fine-tune your KPIs as you begin to see an activity more clearly.
For example, if a lower cost per lead means that you’re generating lower-quality leads, you can put some qualification criteria into the mix and start tracking cost per qualified lead.
The companies that use KPIs most effectively are those that share and discuss the metrics with their employees. That leads to more empowered workers who don’t need to be micromanaged, because they can see how they’re performing – and know their managers can see too. Many business software programs allow you to create a simple dashboard on employees’ computers, which gives them daily insight into their KPIs and lets them clearly see how well they’re performing. When they have that high-level of insight into their goals, they’ll use their own ingenuity to accomplish them.