Key performance indicator (KPI)

Definition

In the context of business and finance, a KPI, or key performance indicator, is a quantifiable metric used to assess and measure the performance of a specific aspect of a business’s operations or financial health.

What are key performance indicators?

KPIs are crucial tools for monitoring progress toward business objectives and financial goals. They provide actionable insights into how well a company is performing in critical areas.

Here are some common KPIs in the business and finance sectors:

1. Revenue growth rate: This KPI measures the percentage increase or decrease in a company’s revenue over a specific period. It helps assess the company’s ability to generate more income.

2. Profit margin: Profit margin KPIs evaluate the profitability of a business by calculating the percentage of profit generated from its revenue. Common profit margins include gross margin, operating margin, and net profit margin.

3. Return on investment (ROI): ROI measures the return a business earns on its investments, indicating the efficiency and effectiveness of those investments.

4. Customer acquisition cost (CAC): CAC is the cost incurred by a business to acquire a new customer. Monitoring this KPI helps assess the efficiency of marketing and sales efforts.

5. Customer lifetime value (CLV): CLV represents the total expected revenue a business can generate from a customer throughout their relationship with the company. It helps assess the long-term value of customers.

6. Debt-to-equity ratio: This financial KPI measures the proportion of a company’s debt to its equity, indicating its financial leverage and risk.

7. Cash flow: Monitoring cash flow KPIs helps assess a company’s ability to manage its daily operating expenses, investments, and debt obligations.

8. Inventory turnover: Inventory turnover KPI measures how quickly a company sells its inventory over a specific period, which is crucial for managing working capital and storage costs.

9. Accounts receivable aging: This KPI assesses the health of a company’s accounts receivable by categorising outstanding invoices based on their ageing. It helps manage cash flow and credit risk.

10. Earnings before interest and taxes (EBIT): EBIT is a profitability metric that represents a company’s earnings before interest and taxes. It’s often used to assess operating performance.

11. Market share: Market share KPIs measure a company’s portion of the total market sales or revenue, indicating its competitive position within the industry.

12. Return on equity (ROE): ROE measures a company’s profitability relative to shareholders’ equity, demonstrating how effectively it uses shareholder investments.

These KPIs provide valuable insights into the financial health and operational efficiency of a business. They help management make informed decisions, set strategic priorities, and identify areas for improvement to achieve business and financial objectives.

Example of key performance indicators

Let’s consider an e-commerce business and the key performance indicators used to assess its performance:

KPI: Monthly sales revenue

• Measurement: The total revenue generated from product sales within a specific month
• Objective: Increase monthly sales revenue by 15% compared to the previous month

KPI: Website conversion rate

• Measurement: (Number of purchases / Number of website visitors) x 100
• Objective: Achieve a website conversion rate of at least 3%

KPI: Inventory turnover ratio

• Measurement: Cost of goods sold / Average inventory
• Objective: Maintain a healthy inventory turnover ratio to avoid overstocking or stockouts

These KPIs help the e-commerce business monitor and assess various aspects of its performance.