When considering a company’s KPIs and metrics, the most important aspect is that they support decision-making, facilitate insights, and provide a forward-looking perspective. It’s also crucial to ensure that key metrics are clearly communicated throughout the organization. The most important KPIs for a company depend on its industry, goals, and strategy. There is variation among different companies, and there is no one-size-fits-all answer to the “right” metrics without a deeper understanding of the specific company and its business. It always requires information about the company and its operations, as well as a skilled professional to carry out the calculation and monitoring of metrics.
What is KPI and What Does It Stand For?
KPI stands for Key Performance Indicator, and it’s a term commonly used in financial management in Finland. A KPI indicates how effectively a company is achieving its key business objectives. It’s a measure that helps the company monitor its performance. Calculating and reporting metrics is an essential part of the CFO’s job. An outsourced CFO can assist and support both in choosing the right metrics and in monitoring them.
KPIs are chosen based on which metrics best reflect the company’s achievement of its goals. This article covers common types of KPIs that many companies track:
- Sales: Total sales, sales by product category or customer segment, average order value
- Customer Satisfaction: Customer satisfaction indices, customer reviews and feedback, number of complaints
- Profitability: Operating profit margin, gross margin, ROI (Return on Investment)
- Customer Loyalty: Acquisition of new customers, customer retention, customer lifetime value, customer acquisition cost (CAC)
- Conversion Rate: Conversion rate of websites or campaigns, i.e., how many of the potential customers complete the desired action, such as making a purchase or submitting a lead.
- Brand Awareness: Brand awareness, reputation metrics, effectiveness of marketing campaigns in brand elevation
- Employee Efficiency: Employee productivity, labor costs relative to production or revenue, employee satisfaction
- Supply Chain Performance: Delivery time adherence, delivery reliability, inventory turnover
- Marketing and Advertising: Advertising costs relative to sales, ROI of marketing campaigns, website traffic and conversion rates, number of social media followers and engagement
- Quality and Errors: Number of errors in products or services, time to handle complaints, number of customer feedback
However, a company’s key metrics may also vary among different companies and industries. Here are some common metrics used to evaluate a company’s performance and financial position:
- Revenue: Revenue represents the company’s sales income over a specific period. It is one of the most critical metrics and reflects the company’s sales activities.
- Net Income: Net income is the company’s profit before taxes and expenses. It indicates the company’s profitability and shows how much profit the company has earned.
- Profitability: Profitability metrics include operating profit margin, net profit margin, and gross profit margin. These metrics help assess how well the company can turn its sales into profit.
- Gross Margin: Gross margin represents the difference between the company’s sales revenue and its direct production costs. It gives an idea of how much the company earns after manufacturing costs.
- Debt-to-Equity Ratio: The debt-to-equity ratio measures the amount of debt a company has relative to its equity. It helps evaluate the company’s financial stability and its ability to meet its obligations.
- Working Capital: Working capital represents the difference between a company’s current assets and liabilities. It reflects the company’s liquidity and its ability to fund its daily operations.
- Earnings Per Share: Earnings per share measure the company’s profit per share. It is an important metric for shareholders and investors evaluating the company’s profitability.
It’s important to note that different companies use different metrics, and metrics are not “one size fits all.” The choice of metrics depends on the company’s industry, goals, and strategy. In some cases, it may be useful to use other metrics based on the company’s specific needs.
At Finaly, we model and ensure that metrics come to life in the company’s everyday operations. We work with our client companies to determine the right metrics – how they are used, utilized, and how they help model the company’s financial situation and future. If you’d like to discuss this topic further, you can book a discussion time with Anne from her calendar here.