Key performance indicators, or KPIs, are the data used to chart a business on its way to success and profits. They’re often used when revenue-starved startups need to identify ways to measure progress in the absence of cash flow. But there’s a big risk: If you choose the wrong KPIs, you may drive your company to financial ruin.
So, how to pick? Identify your business goals and the activities that lead directly to achieving them. And keep in mind that more often than not, bad KPIs are the result of upper management and the board deciding what to track. You’re better off listening to frontline employees; they’ll give you more granular KPIs that truly show you how the company is doing. (See the chart below for some starter ideas.)
Turn bad KPIs into good ones
BAD: Total number of deliveries doesn’t account for incomplete orders, and big orders can mask problems.
GOOD: A low percentage of full deliveries vs. all deliveries indicates a logistics or supply-chain issue.
BAD: Only tracking revenue can hide a slowly rotting operation on its way to failing.
GOOD: A stronger indicator of current and future revenue is percentage of closed leads per sales rep.
BAD: Customer satisfaction is a vague metric, unreliably comparing you with competitors.
GOOD: Percentage of customers referring new business really tells you if people are satisfied.
BAD: Units produced is meaningless, because an inefficient factory can still churn out a ton of product.
GOOD: Yield per production step breaks down each step’s profitability and efficiency, so you can zero in on waste.
BAD: Net profit is misleading, because poorly performing lines can hide behind star products.
GOOD: Percentage gross margin by product tracks profits of each line, leaving no bad ones hidden.