Key performance indicators (KPIs) are important business metrics used for the analysis, management, and control of companies. They assist decision-makers in evaluating the efficiency and profitability of processes, departments, and the entire company and, if necessary, in taking measures for improvement.
In this glossary entry, you will learn more about the different types of KPIs, their significance, and how they are applied in everyday business.
Definition: Key Performance Indicators
Key performance indicators are quantifiable measures that are used to convey information about the performance and success of companies or their subdivisions. They enable comparisons between different business units or periods and thus support the analysis, management, and control of companies. KPIs can originate from various areas, such as finance, human resources, or production.
Types of Key Performance Indicators
There are different types of KPIs, which can be differentiated by their area of application, their informative value, and their origin. Here are some examples:
- Absolute KPIs: They indicate a specific value, for example, sales revenue or the number of employees.
- Relative KPIs: They relate two absolute KPIs to each other, for example, return on sales, which sets sales in relation to profit.
- Monetary KPIs: They are expressed in units of currency, such as cash flow or net income.
- Non-monetary KPIs: They are not expressed in units of currency, but in other units of measurement, such as the quantity of production or the number of customer complaints.
- Quantitative KPIs: They refer to measurable quantities, such as the number of goods produced.
- Qualitative KPIs: They provide an assessment that is not directly measurable, such as customer satisfaction or employee motivation.
Significance of Key Performance Indicators
The significance of KPIs lies in their ability to translate complex facts and processes into simple, easily understandable information. They enable decision-makers to evaluate the efficiency and profitability of processes, departments, and the entire company and, if necessary, to take measures for improvement. Furthermore, they are an important tool for communicating information within the company as well as to external stakeholders such as investors, customers, or suppliers.
Application of Key Performance Indicators
KPIs can be applied in various areas of a company, for example, in finance, human resources, or production. Here are some examples of KPIs in these areas:
- Finance: Revenue, profit, return on equity, debt ratio
- Human Resources: Personnel cost ratio, turnover rate, employee satisfaction
- Production: Productivity, utilization, throughput time, scrap rate
KPIs are also used in marketing and customer relations, for example, to measure customer satisfaction, brand awareness, or the effectiveness of marketing activities.
Selection and Interpretation of Key Performance Indicators
When selecting KPIs, it is important that they are meaningful, relevant, and goal-oriented. This means that they provide real value for the analysis and management of the company and are aligned with the achievement of the company's objectives. However, care should be taken not to use too many KPIs to avoid information overload and dilution of their informative value.
When interpreting KPIs, it is important to consider the context and possible influencing factors. A single KPI often cannot depict the entire situation; therefore, it is always advisable to consider multiple KPIs and analyze their interrelations. Also, comparing KPIs over different periods or with industry-specific benchmarks can be helpful in better understanding the development of the company.
Conclusion
Key performance indicators are an indispensable tool in business management practice, helping decision-makers to evaluate the performance and success of companies or subdivisions and, if necessary, to take measures for improvement. It is important to select meaningful, relevant, and goal-oriented KPIs and to consider their interrelations and influencing factors when interpreting them.
