What is KPI and How to use KPI as a tool to increase you company profits

What is KPI?

KPI stands for Key Performance Indicator.  The operative word is “Key” because every KPI should relate to a specific business outcome with a performance measure. 

Definition obtained from klipfolio.com is as follows:

A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

https://www.klipfolio.com/resources/articles/what-is-a-key-performance-indicator

Many CEOs and Business Owners do not communicate their company business objectives clearly, without focus on what they want to achieve to their  stakeholders such as employees are in limbo on what is expected of them.

With no KPI, CEOs and Business Owners experience:

  • No focus on business objectives
  • Micro manage
  • Lack of purpose
  • Stress and frustration

So, what are the benefits of using KPI as a tool to increase your company profits?

5 Benefit of KPI as a tool to increase your company profits

I use KPI as a tool in my HRS systems in helping company increasing profits.  As Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

Benefit #1: Performance measurement is clear

Having KPIs, performance measurement is clear.  Each individual is clear what performance is being measured and he/she can work to achieve the goal.  The goal is set at the beginning and measured at the end on the achievement.

Benefit #2: Objective of the company is clearly communicated

As KPI is connected to critical business objective, when constructing KPIs from high level to low level there is one silver lining that connected all department and division to work toward common business objective.  As each individual has KPI to achieve, company goal is well communicated.  Word of caution, when constructing KPIs please always keep in mind the business objective the CEOs and Business Owners want to achieve.

Benefit #3: Increase accountability

As KPI should be measurable and monitored, it increases accountability of each individual.  His/her KPIs are set at the beginning, the individual  is expected to achieve the KPIs and should make an effort to achieve the target.  As there is clear KPIs to be measured, it increases accountability.

Benefit #4: No need to micro manage

With KPI, all employees are expected to know what is expected of them and the goal they need to achieve, therefore, there is no need to micro manage for the supervisor and manager, thus they can spend more time focusing on the revenue generating activities.

Benefit #5: Enforce habit and form corporate culture

After completion of the implementation, the systems built needs to be maintained, the habit needs to be nurtured and overtime, habit will become culture.  This is especially applicable to the low-level KPIs which focus on processes.

As KPI is usually tied to individual performance, it is related to pay raise and bonus, reward and punishment system can help in shaping the habit and form corporate culture.

By using KPI as a tool to increase company profits, we can maintain what has been implemented and use it for the long term.

How to structure KPI?

KPIs need to be defined according to critical or core business objectives.  KPI should be Specific, Measurable, Attainable, Relevant, Time-bound.

First step in determining your KPI is having a clear objective, this is the MOST important part.   A KPI needs to be intimately connected with a key business objective which is integral to the organization’s success.

To help you understand what KPI is and how to structure KPI, I give an example to better understand this.

A company would like to achieve sales of x units, each sales transaction to be completed within  x days.  In order to achieve this sales target, sales/marketing department has the most responsibility, but it has to be supported by Legal, Operation and Finance.  Therefore, Sales/Marketing department has the above KPI, in operation, legal and finance have KPIs that support Sales KPI so that the company’s effort is all toward a common goal. 

To get 100% score, KPI of sales/marketing dept has weight for example 40%, Operation 20%, Legal 20%, Finance 20%. So that each division/dept cooperate to achieve the KPI target.  Most of the time KPI is tied to budget. 

In many companies, most KPIs have hard skill target but also have soft skill target such as team work, leadership skill etc.

Knowing the definition and the structure of KPI, next is how do we use KPI as a tool to increase your company profits?

How to use KPI as a tool to increase your company profits?

Many companies use KPI but they do not get the full benefit of KPI due to the missing link. To get the full benefit of KPI, CEOs and Business Owners need to connect KPI, what are they?

As discussed above in order to structure your company KPI you need to determine your company vision, mission and core value and also you critical business objective.  Therefore, you need to connect KPI to your company vision, mission and core value as well we your critical business objective. 

Furthermore, you need to link KPI to reward and punishment so there is a positive reinforcement for achieving the KPI set at the beginning.  KPI is also used as a tool to create habit and form corporate culture to maintain the solution provided in HRS systems to work for the long term.  As the systems built needs to be maintained and reinforced, KPI is one tool used to create that habit.  Thus, KPI is effectively used as a tool to increase your company profits for the long term.

Summary

KPI is one tool used to increase company profits.  KPI is a measurable value that demonstrates how effectively a company is achieving key business objectives.

5 Benefits of KPI as a tool to increase your company profits:

Benefit #1: Performance measurement is clear

Benefit #2: Objective of the company is clearly communicated

Benefit #3: Increase accountability

Benefit #4: No need to micro manage

Benefit #5: Enforce habit and form corporate culture

KPI is one powerful tool to keep the engine well maintained i.e. the Systems implemented well and running.  It can shape the behavior of the employees when combined with reward and punishment.

KPI should be Specific, Measurable, Attainable, Relevant, Time-bound.

To use KPI as an effective tool to increase your company profits, KPI needs to be connected to your company vision, mission and core value, critical business objective, as well as reward and punishment to form habit and corporate culture and thus it can be used a tool to increase your company profits for the long term.

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KPI FAQ

What is KPI?


A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. The operative word is “Key” because every KPI should relate to a specific business outcome with a performance measure.

What are the benefits of KPI?

Benefit #1: Performance measurement is clear
Benefit #2: Objective of the company is clearly communicated
Benefit #3: Increase accountability
Benefit #4: No need to micro manage
Benefit #5: Enforce habit and form corporate culture

How to structure KPI?

KPIs need to be defined according to critical or core business objectives.  KPI should be Specific, Measurable, Attainable, Relevant, Time-bound.

How to use KPI as a tool to increase your company profits?

Many companies use KPI but they do not get the full benefit of KPI due to the missing link. To get the full benefit of KPI, CEOs and Business Owners need to connect KPI, what are they?

Firstly, you need to determine your company vision, mission and core value and also you critical business objective.  Therefore, you need to connect KPI to your company vision, mission and core value as well we your critical business objective. 

Furthermore, you need to link KPI to reward and punishment so there is a positive reinforcement for achieving the KPI set at the beginning.  KPI is also used as a tool to create habit and form corporate culture to maintain the solution provided in HRS systems to work for the long term. 

As the systems built needs to be maintained and reinforced, KPI is one tool used to create that habit.  Thus, KPI is effectively used as a tool to increase your company profits for the long term