What is a Key Performance Indicator? Definition and Best Practices

key performance indicator

Disclosure: Links to other sites may be affiliate links that generate us a small commission at no extra cost to you. ????

You can’t measure what you can’t control. Establishing your key ???? performance indicators can tell you whether or not you are making progress in your current undertaking. But what exactly are key performance indicators, and how can you make the most out of this metric? 

Keep on reading and take note. 

What are Key Performance Indicators (KPIs)?

Key Performance Indicators or KPI are metrics organizations use to objectively determine how far they are towards reaching their goals. They help an organization’s constituents better visualize the steps they need to take, thus making those goals more tangible.

KPIs are better introduced at each level, and cascaded from top to bottom. Doing so makes the small, actionable steps easier to execute, instead of implementing a one-time-big-time performance evaluation at the end.

KPI for Performance Management

Performance management is a tool to foster open communication between management and employees. Its goal is to create a better working environment where people can effectively and efficiently perform their best. This is achieved through KPIs that monitor, track and evaluate performance against a goal or standard.

Building a Better Team with KPIs

KPIs should be used as a fair assessment tool to propel you and your team towards achieving greater heights ???? in your goals. The objectivity these metrics provide is meant for superiors to help team members improve. This fosters better team dynamics, and improved performance.

Types of KPIs

KPIs can be categorized into qualitative and quantitative, depending on your metric of choice. While both types can function substantially on their own, combining the two will cover more aspects of your project, and give you a clearer picture of what lies ahead in the next stages.

Among the many types of KPIs, we have a micro list here of the ones that might be most applicable to freelancers, startups, small business owners, and other self-employed individuals!

1. Customer Metrics

Customers are a huge part of your journey to success. This means that you should gather whatever relevant information you can about them and use that information to your advantage. Look for data points that you want to be able to control ???? to improve your business.

Specifically, you might want to look into the following customer metrics: 

  • Customer satisfaction scores or ratings
  • Customer and employee engagement
  • Customer retention rate

The specific metric you’ll be using will depend on the kind of customers you have, and the type of business you are in. For example, if your business line is in customer service, then establish KPIs that focus on customer behavior and engagement. 

2. Financial Metrics

Any business must have KPIs for their financial health and status. This is one of the KPIs you wouldn’t want to skip because it’s like a lifeline for your business. It even applies to passive forms of businesses, where the owners exert little to no effort in the running and maintenance.

The financial elements that you would want to monitor for your business include:

  • Sales
  • Profits
  • Losses
  • Expenses
  • Cash flow

One practical thing you can do when setting up financial KPIs is to determine how much of those elements you’ll need at minimum to reach the break-even point. Make those values your lowest scales on the spectrum, then work your way up from there. Doing so will ensure your financial goals are realistic and achievable. 

3. Process Performance Metrics

Process performance metrics is a mainstay in any business that does production, where one process flow creates one product. These KPIs can give you an idea ???? on your company’s productivity in terms of:

  • Efficiency
  • Effectivity
  • Capacity
  • Profitability
  • Competitiveness

Depending on which areas of your process flow you want to focus on, you may choose to apply a combination of these KPIs for process performance in your business.

KPIs Limitations

You’ll need some form of measurement in order to determine how and what to improve in your business. While KPIs can be based on targets and milestones, they do have some limitations that you should be aware of. Knowing about them early on will help you figure out what adjustments to make, or choose supplement indicators for your metrics.

These limitations are:

  • Some KPIs might be used as a benchmark even though they are not applicable to some goals, just because they are popular.
  • Some KPIs, like employee management, might be hard to quantify. You’ll need to supplement these with qualitative indicators for evaluation.
  • Establishing, measuring, and chasing KPIs can be costly. 

Qualities of Effective KPIs

To be effective, KPIs should be:

  • Clear and simple
  • Relevant and aligned with your project or undertaking
  • Realistic and actionable
  • Easy to gauge or measure

Defining Your KPI

It might be helpful to use a mindmap ????️ when defining your KPIs. You can also use a productivity tool like ClickUp to make things easier to view and share to your colleagues.

Here is a list of things you should ask yourself when defining your KPIs:

  • What is my desired outcome?
  • What is the significance of it?
  • How do I measure my progress?
  • What factors can influence the possible outcomes?
  • Who can help me achieve my target?
  • How often should I evaluate?

You get to choose what indicators you’re going to use for your performance assessment. However, keep in mind that you should not do this haphazardly, as an incorrect metric of evaluation can be detrimental to your success.

SMART KPI and SMARTER KPI

It is always best to use the SMART guidelines in your goal-setting. Making each bullet point Specific, Measurable, Attainable, Relevant, and Time-bound helps you focus on what’s essential. But did you know that there are SMARTER KPIs?

The E and R stand for Evaluation and Reevaluation. What do they mean?

  • Evaluation. Assessment should not stop once a goal is reached or when the time allocated to it has run out. Evaluate after every goal, and before setting new ones for another project. 
  • Reevaluation. This creates a cycle of continuous improvement by helping you find ways to improve the system until there are no more chinks in the armor. 

Use SMART KPIs if it’s your first time to set goals, and SMARTER KPIs for any succeeding ones. 

Writing and Developing KPIs

Did you take down notes on the qualities of effective KPIs that we mentioned earlier? If yes, then place your notes next to you because you’ll need them to write and develop your KPIs. Think of them as a cheat sheet and ask yourself the following questions:  ????

  • Are my KPIs clear and simple to understand? Removing any unnecessary words from your KPI description will help communicate a clearer picture to your team.
  • Are my KPIs relevant and aligned with my project or undertaking? Be as specific as you can with your KPIs for a project. Doing so will help align your team to the goals you want to achieve. 
  • Did I make my KPIs as realistic and actionable as I can? Know your team’s limits and let them work within their allocated resources to ensure they can deliver the right results. 
  • Are my KPIs easy to gauge or measure? You can’t control what you can’t measure, and you can’t improve what you can’t control. Ensure that you have a direct answer when asked about a KPI.

KPIs evolve with the project. This is why evaluation and reevaluation are necessary. Continuously thinking of ways to make each indicator easier to define and understand is the key to walking the path to success more confidently.

How to Create KPIs

Now that we’ve defined and emphasized how important KPIs are, let’s learn how to create them. We’ll put ourselves in a freelancer’s shoes as an example.

key performance indicator - 1

Step 1: Set Objectives

Let’s say that as a freelancer, your objective is to leave your day job as soon as you can. To do so, you’ll need to save up enough money to pay for your bills and living expenses for at least the next six months. ????

Step 2: Prepare an Outline

The next step would be to outline the criteria needed to achieve this goal. In this context, answering the following questions will be helpful:

  • How many months are left for this year?
  • What are your fixed and variable bills? Which of these can you control?
  • Are your living expenses also variable?
  • How many months should your savings be able to cover before you can comfortably leave your day job?

Step 3: Data Collection

You can use an estimate just to have a closer understanding of the bigger picture, but for the sake of accuracy, it’s best to collect more specific data. This is where using spreadsheets and databases like Airtable and its alternatives will come in handy.

You can make a list of the financial metrics in your productivity tool and measure them on a monthly basis to get a good estimate of the numbers you’ll be working on. Determine how much you earn in a year, and exactly how much money you’ll need to save before you leave your job. Receipts can also be a source of data if you have them.

Step 4: Build the KPI Formula

Lay out all the data so you can set the time frame for achieving your objective. To do this, get your average savings per month. Then, divide your targeted amount of savings by your average monthly savings. The result is the number of months you’ll need to keep working to achieve your goal. 

Average savings = Total amount of savings/ Number of months working 

Target time to completion (in months) = (Target amount / average earnings)

For example, you managed to save $20,000 in a year ????. Divide that by 12 working months and you’ll get an average of $1,666.67 savings per month. You estimate that you’ll need at least $15,000 to live comfortably for the next six months without work. Divide $15,000 by $1,666.67 and you’ll get an answer of 8.9. This means you’ll have to work for at least nine more months before you can quit your day job to focus on freelancing.

Step 5: Present Your KPIs

Using all the information gathered from steps 1 to 3, and applying them to the formula in step 4, your SMART KPI might look something like this:

Save $15,000 in the next eight months to cover six months’ worth of bills and cost of living.

At an organizational level, it can be as simple as this or as complex as using business-scale data. But it’s best to break them down into smaller, more digestible chunks, because then you can take on building the KPIs for any project.

You Might Ask

What are examples of key performance indicators?

Some examples of key performance indicators are new inbound leads, return on equity (ROE), planned vs. actual hours, conversion rates, employee turnover rates, first contact resolution rates, budget variance, and time to productivity.


What are the top 5 key performance indicators?

KPIs are specific to a setting, organization, and project. But if we’re looking at generic ones, then the top five key performance indicators are profit margin, growth, hourly or daily rates, social media metrics, and productivity.


What does a key performance indicator (KPI) measure?

As the name implies, KPI measures the performance of a company or organization in achieving set goals and objectives. Performance can be measured in terms of targets, milestones, insights, and progress gauges. 


How do you write a good KPI?

When you write a KPI, you should set a clear and simple objective. Then, prepare an outline for your criteria. Collect relevant data to make sure the numbers are real and not made up. Plug them into a custom formula, depending on the information you have. Finally, present them to clients and stakeholders and ask for their feedback before finalizing. 


What is a KPI for an employee?

KPI for employees measures their performance progress in doing a certain task or project. It can be as quantifiable as hitting quota and targets, or it can be measured in terms of quality such as in customer service satisfaction.


How is KPI calculated?

KPI can be calculated by manipulating the positions of the target output, the current input, and other available data in the KPI formula. For example, to obtain the minimum amount of inputs needed to achieve a specific percentage output, you can divide the target output by the current input and multiply it by 100.


Conclusion

KPIs make your goals more tangible by breaking them down into chunks of realistic and doable steps. They are there to measure parameters that you can control in order to improve your processes. 

Before you cascade your KPIs, make sure that your stakeholders understand what they are for and why you are implementing them. This helps to ensure that they execute quality work, rather than work just to complete a deadline.

It can be intimidating at first, but we hope that this article helped you gain the confidence and knowledge ???? needed to start creating your own KPIs.

Related Articles

Responses


Notice: Trying to get property 'avatar_manager_avatar_type' of non-object in /home/dh_jpy8r3/hustlehackers.org/wp-content/plugins/avatar-manager/avatar-manager.php on line 1092

Your email address will not be published.