Business KPI | 2 mins read

7 Steps for Developing Profit Enhancing Business KPIs

7 steps for developing profit enhancing business kpis
Jin Hyun

By Jin Hyun

Business KPIs are crucial when it comes to setting performance targets and tracking success across all departments. However, organizations must analyze their current situation and company objectives to craft relevant, profit-enhancing performance indicators.

What are KPIs and Where Can They Be Implemented?

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When it comes to evaluating success within a business, there is no greater measurable value than a Key Performance Indicator (KPI).

In the most basic sense, KPIs allow businesses to measure performance while further enabling them to track key business objectives across all sectors, whether it's marketing, sales, or human resources. Once a company has defined and set their targets, KPIs can be monitored using data integration and reporting software.

Across different industries and departments, there is a wide variety of KPIs businesses can implement, such as-

  • Marketing Metrics
  • Gross Profit and Cash Flow
  • Cost of Goods Sold
  • Customer Lifetime Value
  • Average Order Value
  • Social Media Engagement
  • Percentage of Product Defects
  • Employee Retention Rates
  • Inventory to Sales Ratio
  • Supplier On-Time Delivery

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7 Key Steps for Developing Business KPIs

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KPIs are vital for helping businesses achieve their goals and track financial metrics. However, the key to developing useful KPIs is identifying the objectives the business is aiming to address, as well as the purpose of tracking the chosen metrics. Discover the key steps to developing profit-enhancing KPIs below.

1. Craft a Clear and Cohesive KPI Objective

This first and arguably most vital step involves marrying a KPI with a specific business objective. This means identifying what targets are directly linked to improving the company in a meaningful way and recognizing processes that are essential to the company's success.

Ultimately, KPIs should be strategically linked with a core goal an organization is aiming to accomplish.

2. Communicate KPIs With the Company Stakeholders

As KPIs reflect a company's core values, it's crucial to communicate this information to all stakeholders within the business. This ensures all members are well versed in the objectives that truly matter while offering stakeholders complete transparency on the company vision and future.

When communicating the chosen KPIs, be sure to explain the context of each key performance indicator so all members understand what is being measured and why. During this step, it's highly beneficial to answer any questions (from both staff and stakeholders) as this will weed out confusion while providing valuable insight. The feedback may also unveil new ideas and suggestions that can be implemented into the KPI strategy.

3. Undertake Regular KPI Reviews

Whether KPI reviews are held weekly or monthly, this regular analysis can consistently track the progress of business goals and provide opportunities to redevelop them if necessary.

As much as a business should strive to craft the most effective and relevant KPIs possible, there's always a chance of the original performance indicator becoming ineffective or unrealistic to track. Regular monitoring allows an organization to alter or change a KPI quickly if it is no longer viable.

4. Ensure the KPI is Actionable

In order to make positive change within a company, the chose KPIs should be actionable. Transforming performance metrics into actionable insights involves a 5-step process-

  • Determine business objectives
  • Review the company's current performance
  • Establish short and long term KPI goals
  • Review targets with the team
  • Review the progress of each KPI and make adjustments as needed
When developing KPI targets, businesses should consider long term goals, as well as the short-term milestones required to get there.

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5. Update KPIs to Reflect Changing Business Needs

The business world is constantly changing and a company's KPIs must be flexible enough to adapt to any external or internal moving targets. The need for KPI revision and alteration could arise from changing markets to plans for company expansion.

If KPIs are not altered to incorporate the changing environment, any performance reviews gleaned from them could be skewed or inaccurate, thus undercutting a company's ability to reach its goals. By ensuring KPIs are reviewed on a frequent and regular basis, alterations can be made quickly and effectively to ensure the business stays on track to reach all targets.

6. Ensure All KPIs are Achievable

Attainable targets are a key ingredient of KPI success. Companies that craft overly ambitious targets are essentially setting their teams up for failure, while a target that's too easy to meet will hamper a business's potential.

To ensure the KPI hits the right mark, it's wise to construct an analysis of the company's current performance. This will not only paint a clear picture of the company's current standing but reveal areas in need of improvement. To accomplish this, businesses can utilize current datasets and devise a baseline standard from the information.

7. Understand the KPI Limits

When it comes to measuring business success, KPI tracking is the ultimate solution. But to be truly effective, it's crucial to alter these metrics when necessary and recognize when they have become outdated. Being unafraid to start from scratch with a new set of KPIs to meet the changing objective is the final ingredient of key business indicator success.

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