Business Glossary

What is a KPI?

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

What does KPI stand for?

A KPI is a Key Performance Indicator. It is a metric used to assess how well a business is performing in a specific area. As KPIs are very specific, small businesses and enterprises alike generally need to use multiple KPIs to get a realistic appraisal of their overall performance.

Examples of KPIs

KPIs can be used for all kinds of measurements at many levels. Broadly, they can be split into two main types: financial KPIs and behavioural KPIs. Behavioural KPIs are applied to the company as a whole, to specific departments or to individuals.

For example, companies might use financial KPIs to benchmark themselves against their competitors. Every publicly traded company has to publish financial statements. These include a profit-and-loss statement, a balance sheet and a cash-flow statement. This means that its competitors can analyse how well it is doing (and vice versa).

Even if a company does not have to publish financial statements, there may still be ways to source the relevant information. At the very least, there is likely to be sector-level data on average performance standards and also some indicators of the strongest and weakest performances.

Companies also routinely use KPIs to assess how departments, teams or individuals are performing. For example, a company might want to assess the effectiveness of its customer service. It therefore sets KPIs for both productivity and quality. Productivity is measured in terms of phone calls taken or tickets handled. Quality is measured through customer satisfaction surveys or formal quality assessments.

Setting KPIs

The starting point for setting KPIs is setting SMART goals: Specific, Measurable, Achievable, Realistic, Targeted goals. Once you have defined these, go on to define SMART KPIs: quantifiable indicators of your progress towards your SMART goals.

For example, a business goal for your company might be to offer best-in-class customer service. The first step is to define what this means in real terms, involving researching what your competitors are doing and creating your own definition of great customer service.

Next, think about what steps you need to take to make your vision a reality. In the case of customer service, that might include making strategic decisions on business hours, contact methods and processes. This determines your practical needs (e.g. staffing levels) and the costs involved.

Finally, decide how to measure and track the success of your strategy. In order to measure success, quantify it as objectively as possible. For example, in the context of customer service, measure call-waiting times, call duration, ticket-response times, customer-satisfaction ratings and call-quality ratings.

Making sure KPIs are relevant

The SMART strategy provides a framework for setting goals to be actually achieved. It also lays a foundation for tracking progress towards those goals. What it doesn’t do is determine whether or not those goals are actually worth the effort of trying to achieve. Similarly, it does not provide any guidance on what to do when those goals come into conflict.

For example, the obvious way to minimise call-waiting times is to increase the number of staff on shift which would, however, entail an extra cost that might compromise another KPI. In a perfect world, all businesses would set all KPIs so that they never come into conflict with one another. In the real world, some level of conflict is practically inevitable. So find a way to resolve that conflict.

In general, decide which goal is more relevant to your business. Then prioritise this as much as necessary to make sure it is achieved. However, do not prioritise exceeding your target for this goal at the expense of not achieving another key goal.

Learn more about planning your business finances.

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