Key Performance Indicators (KPIs) are tools that help you understand how your organization is functioning in relation to the strategy or objective of the business. These indicators allow you to assess performance as they relate to your organizational goals or purpose.
How KPIs work
- KPIs need to be well defined and measurable
- Be applicable to the strategy or direction of the business
- Are crucial in assessing the execution of your purpose
When selecting your KPIs, it’s important to determine how you will use these results to inform your future business decisions.
For example, if your organization’s current objective is to maintain positive monthly cash flow, it would be useful to track your accounts receivable turnover ratio. This ratio informs the rate at which sales made on credit are translated into cash for the organization.
Accounts Receivable (AR) Ratio = (Sales/Average AR)
A high AR turnover ratio indicates that the company is having problems collecting on sales made on credit, which directly impacts the monthly cash flow in the organization. A low AR ratio indicates a quick turnover of sales made on credit, into cash.
KPIs allow you to measure key areas that are crucial in the successful execution of your strategy. These indicators also highlight areas where business improvements can be made.
If maintaining client relationships is an objective of your company, KPI indicators such as customer acquisition costs and customer retention rate will be helpful indicators of measurement.
The cost of finding and monetizing new customers can be a hefty portion of a startup’s total expenditure. These KPIs help translate just how well you are doing at managing customer costs and can inform how effective you are at keeping the customers you have.
Customer Acquisition Cost: the resources that are needed for a company to attract new customers and continue its growth.
Customer Acquisition Cost = total amount spent on marketing / # new customers
Customer Retention Rate: the percentage of the customers you retain in relation to the number of customers you had at the start of a specified period. Ensure that you define the period you are looking at, is it customers per month, quarter, year?
Customer Retention Rate = ((CE – CN) / CS) × 100
CE = Number of customers at the end of a specified period
CN = Number of new customers acquired during a specified period
CS = Number of customers at the start of a specified period
Profit is the most commonly used indicator for the measurement of success, but it isn’t the only one. Ensure you are meeting the strategic objectives of your company by using KPIs that translate your objective into measurable progress.