Like race car drivers, business owners need to monitor gauges on their dashboards to keep an eye out for serious operational failures before a total breakdown occurs. These gauges are commonly referred to as key performance indicators (KPIs).
There are two broad categories of KPIs: financial and nonfinancial. Financial KPIs often take the form of ratios, such as:
- Debt to Equity: Total Debt / Shareholder’s Equity,
- Current Ratio: Current Assets / Current Liabilities, and
- Days Sales Outstanding: Number of Days × Accounts Receivable / Credit Sales.
Nonfinancial KPIs may include measurable metrics in the areas of customer service, sales and marketing. For example, if a company’s goal is to improve its response time to customer complaints, its KPI might be to initially respond to complaints within 24 hours, and to eventually resolve at least 80% of complaints to the customer’s satisfaction.
KPIs differ from one company to the next based on industry, company type (B2B or B2C, for example) and, most important, strategic objectives. Your KPIs will stem mainly from your mission statement and your short-, medium- and long-term goals.