Key Performance Indicators (KPI) Definition


A key performance indicator is an economic measure that facilitates comparative analyzes.

What Is Key Performance Indicators (KPI)?

Key Performance Indicator, also known as the KPI are used as a basis for comparisons where the various measures can be compared with competitors or results in the same area from previous years. Key figures can also be used as a basis for decision-making for economic changes and analysis.

In addition, KPIs provide a good overview of the company’s financial condition, which can be interesting for potential investors, and that it provides banks with information about the company in the event of a loan application.

Why are KPIs important?

KPIs (Key Performance Indicators) are clear and specific metrics or key figures that companies and organizations can use to track and measure their progress on the path to a specific goal.

KPIs are used e.g. to measure the ROI of the marketing in order to be able to prove to a management what sales the marketing has generated.

There are thousands of KPIs and it’s easy to get caught up in routines that make you look at irrelevant KPIs and metrics that actually say nothing.

It is also common for the KPIs you as a marketing team you work with to change over time as you gain greater control over your digital presence.

This means that for a period of time you need to focus on getting traffic to the website to later measure how many leads you get.

Later you also want to measure how many of these leads actually turn into business and once that happens you want to know which marketing activities ultimately led to the most profitable deals.

Even here, the jungle of KPIs is overwhelming.

Common KPIs for a company are usually:

  • P/E ratio – earnings per share: Used to see how cheap or expensive a share is compared to other companies, where the profit is set in relation to the price.
  • Equity ratio: Divide the equity by the total assets (sum of the assets) to calculate the equity ratio in a company.
  • Liquidity – a company’s access to cash and cash equivalents in relation to current liabilities.
  • Operating margin – simply put revenue minus costs in relation to the company’s sales.

Different types of key figures & KPIs

Key figures are divided into different categories depending on what they are measuring. The Swedish Association of Financial Analysts (SFF) has developed a recommendation to get a more uniform overview of the various key figures and thus divided them into four different categories:

  • Yield figures
  • Measures of labor and capital intensity
  • Financial measures
  • Stock-related measures

The otherwise most common divisions of KPIs are:

  • Profitability measures
  • Financial measures
  • Business measures

1. Yield figures

These types of measures measure a company’s return, which shows how the value of an asset has changed from a certain point in time to another.

The return figure also includes margin measures, such as profit margin and gross margin, which show how much of the profit in a company is pure profit and how large the turnover is after the cost of goods sold has been deducted.

2. Measures of labor and capital intensity

This category contains measures that affect personnel and the company’s capital and compares the use of capital with factors such as labor and production.

For example, the measure of turnover per employee shows how productive the company is and the rate of capital turnover how much the income increases in relation to the capital that the company has.

3. Financial ratios

Financial key figures, also called financial measures, show a company’s financial strength. An example of such a measure is equity / assets ratio, which shows a company’s long-term ability to pay.

Another measure that falls into the same category is the interest coverage ratio, which shows how much a company’s profit can be reduced without risking interest payments.

4. Key figures for shares

These types of measures are of interest to those who have shares in the company. To enable comparison between share price and profit, what is called a P/E ratio is used, from the English price / earnings.

Another interesting share-related measure is the dividend as a percentage of equity, which is the dividend divided by the equity per share.

Leading and lagging KPIs

Usually, a distinction is made between leading and lagging key figures. Simply put, it can be said that lagging KPIs measure how you meet the goals you set and are a statement of the outcome, unlike leading KPIs that must measure directly influential metrics that lead to the goal – where you drive development in the desired direction.

Today, it is absolutely most common to measure lagging key figures, which is not wrong, but these therefore need to be supplemented with leading key figures.

The hope is that the leading key figures will help you predict the outcome of the lagging key figures, ie if you will achieve your most important goals.

Example:

  • Proportion of support questions the company has answered within the agreed time (leading) – Customer satisfaction (delaying)
  • Proportion of invoices to customer issued of all orders placed (leading) – Cash flow (delayed)

Use KPIs that management understands

To make your management team understand how important your marketing team’s efforts are, you need to learn how to translate common marketing measures into valuable KPIs and use a language that management understands.

On the one hand, you get a hearing for all the work you and your marketing team do and on the other hand, it helps the management to see the whole picture.

That marketing and sales are on the same team. You have a common main task – to increase the company’s sales.

The best KPIs are therefore those that combine marketing work and sales success in one and the same report.

The following reports are best suited for B2B marketing where some form of lead collection takes place.

Did you know that the odds are 900% higher to get a deal if you respond within 5 minutes of an incoming lead than if you wait 5 minutes. And by doing 6-9 follow-ups, you increase the value of the lead by 90%.

How are KPIs used in Digital Marketing?

Key figures are used in different parts of a company and of course also to measure the effectiveness of digital marketing and to manage your marketing team both strategically and tactically.

Which KPIs you want to use in your company and in your digital marketing is of course completely dependent on what industry you are in, as well as what approaches and tools are used to achieve the company’s goals.

It is always important to have clearly set goals and clear indicators of whether the work that is being done is going in the right direction or not, not least when it comes to digital marketing initiatives.

The advantage of the digital part of a company is that it is usually very measurable and in this way you can get a lot of data to keep track of developments.

A challenge when it comes to digital marketing may rather be to select a few KPIs to focus on.

When the possibilities are many, it can easily become too scattered if you use too many key figures, which can rather make the evaluation more difficult.

Some of the most common digital key figures you can use together with your customers are:

  • Website traffic
  • Number of conversions according to set goals
  • ROI – return on investment
  • ROAS – return on ad-spend / return on advertising cost
  • CPC – cost per click / cost per click
  • CPA – cost per action or cost per acquisition / cost per activity or cost per lead
  • Range / exposures
  • Interactions (comments, reactions, video views, shares and clicks)
  • Display frequency
  • With several.

Seven important key Performance Indicators for companies

1. Profitability

Profitability is one of the most important measures of a company’s profitability. It is simply a matter of how much return the company receives on capital.

Many people use this key performance indicator when trying to value a company, but also to measure profitability in a project or compare profitability within different departments in a company.

2. Equity ratio

Equity ratio is a key figure that indicates how large a part of the company’s total assets has been financed with equity. A good equity ratio says a lot about a company’s long-term ability to pay.

According to Statistics Sweden, the hotel and restaurant industry is the industry in Sweden with the lowest average equity ratio, which had major consequences during the corona pandemic.

3. Operating profit

Operating profit is the difference between the company’s operating income and its operating expenses.

You calculate your operating profit by taking the business’s income and deducting costs – so you should not deduct the company’s interest or taxes.

4. Operating margin

Operating margin is a key figure that shows how large a share of your company’s operating income is left to interest, tax and any profit after you have deducted your operating expenses.

A prosperous company has a high operating margin and vice versa.

A higher operating margin means that a larger share of your company’s revenue remains in the business rather than going out as expenses.

5. Gross margin

Gross margin or gross profit margin is a key measure of profitability in many industries – not least for the manufacturing industry and trading companies.

The gross profit shows how much of the turnover remains after the direct costs (purchasing, manufacturing, etc.) for the product have been deducted.

6. Cash liquidity

Cash liquidity is an important key performance indicator to keep track of – both in your own company and before a big deal with another company.

Banks and lenders may also want to know about cash liquidity when, for example, they are counting on an extended credit line.

Cash liquidity provides an indication of how easy a company can be to pay its debts and financial commitments in the short term.

7. Profit margin

How much profit does the company make as a percentage of its turnover? This is a key measure for entrepreneurs, investors and others.

The profit margin is different in different industries, and therefore it is best that you compare yourself with companies in the same industry.

Purposes of key figure analysis

The purposes of key figure analysis are multiple. They are of the following types:

1. Analysis of the company’s status and development

The most common purpose is to analyze the own company’s status and development trends. In this context, status refers to current levels of efficiency and profitability as well as the financial structure.

The purpose here is partly to monitor that the company utilizes the invested resources in an efficient manner, and partly that the company’s financial structure is in balance with resource needs and market conditions.

2. Competitor analysis

Another important area for key ratio analysis is the monitoring of equivalent competitors in order to seek to determine the company’s relative development.

How is the company doing? Are competitors growing more than us? Are they more profitable?

Without knowledge of the normal levels of the industry, realistic goals for one’s own operations cannot be formulated either.

These comparative analyzes are called benchmarking.

3. Analysis of customers and suppliers

An often neglected area is an analysis of customers and suppliers. The company’s own operations are highly dependent on important customers’ development of profitability and ability to pay, as well as the stability and price efficiency of suppliers.

This is especially true when the company is faced with new customers and suppliers, where an analysis can also help to limit the company’s risk level.

4. Budget objectives

Based on historical developments and competitor analyzes, key figures can also be used as target values ​​in budgets or planning processes.

It is in this way that the business is evaluated afterwards, which is why the goal from a management point of view should be formulated from the beginning in order to be anchored in the organization.

Conclusion

Tips when using KPIs:

To really keep track of your business, you should do a reconciliation every week. A tip is to make it a habit to have a “Friday report”, where you ask the accounting consultant to print a profit report and a balance report, partly for the last week and until then during the financial year.

Set up a certain continuity on your reports, whether it is weekly or monthly. You get a clearer picture of the development in your company and are therefore more encouraged.

Often you do not need to use key figures to keep track of your company, it all depends on how big your company etc. factors which key figures you benefit from making calculations on or if you just need a quick look at your income statement / balance report.

However, always keep track of how much tax you owe, so that you are not there when the tax is to be paid, whether you have a monthly payment / quarterly or once a year.

If you can not afford to pay the tax, you have the so-called tax liability representative in a limited company and therefore becomes personally liable and in an individual company you are of course directly personally liable.

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Kevin

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