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Everyone talks about KPIs, but do you know what makes a good or bad KPI? Tracking and forecasting KPIs is empowering and valuable for any organization, but only if done right.

A key performance indicator is a metric used to measure and evaluate how well a company is achieving its set goals. Peter Drucker once said,  "what gets measured gets done." KPIs help organizations work towards their critical objectives by creating a basis for the value of work done.

Types of KPIs

There are many types of KPIs, but you should pick those most suitable for your business. The most common types of KPIs are:

  • Leading indicators — they predict how successful an outcome will be
  • Lagging indicators — they show how successfully an organization achieved its goals in the past.
  • Financial indicators — they indicate how well a company is generating profits and revenue.
  • Output indicators — they reflect the outcome of the organizational processes.
  • Process indicators — they indicate how efficient the organizational processes are.

Other KPIs include input indicators, qualitative indicators, quantitative indicators, actionable indicators, etc.

What Makes a Good KPI

Key performance indicators can launch your business to greater heights if implemented correctly. A good KPI is usually S.M.A.R.T.

  1. Specific — It has to show exactly what you want to achieve and shouldn't contain generic terms. E.g., increase the revenues by 25% by the next quarter.
  2. Measurable — How can you tell that you have achieved what you set out to do? The KPI should be quantifiable. E.g., increase sales by 10% every month.
  3. Achievable — The goal is to push and motivate your employees, but if the KPIs are unrealistically high, people will be unmotivated. If it is too low, they will become complacent.
  4. Relevant — Pick KPIs that are directly related to your line of business.
  5. Time-bound — Your goals should have deadlines; otherwise, you'll have a hard time measuring the KPIs' effectiveness.

You can expand this to include two qualities; evaluate and re-evaluate. KPIs need to be constantly evaluated to determine their effectiveness and make changes when necessary. For example, if you had set a KPI to make 5 million sales per quarter but only managed to make 3 million in sales per quarter, you may have to adjust the KPIs to reflect the market conditions. The same applies if the KPIs were easily attainable.

Not everything that can be counted counts.
Not everything that counts can be counted.
- William Bruce Cameron

How to Develop KPIs

KPIs are developed to help you achieve your business goals, so make sure they align with the company's key objectives. Here are effective tips for developing key performance indicators for your organization

1.   Share Them with Stakeholders

This includes the employees, management team, and the directors. They can only achieve the set KPIs if they are aware of what they entail. For maximum efficiency, take the stakeholders through the KPIs so that they not only know what they are but also understand why they have been set.

2.   Base Them Off Your Organizational Goals

The KPIs need to be integral to your organization's success, and that's only possible if they are related to the set goals. Write a clear objective for the KPIs to ensure you are working towards your business's impactful goal.

3.   Make Sure They Are Actionable

Break down the KPIs into actionable bits. For example, if you had set out to sell 3 million units of a product in one month, break it down into daily and weekly targets. Breaking them into short-term goals makes it easy to assess the progress.

Use KPIs for Continued Business Success

Keep developing your KPIs to suit the changing needs of your business and the dynamic market conditions. Check regularly how your business is performing against the set indicators and scrap off those that are no longer effective. This may sound like an exhaustive process, but it is important for your business's growth and success.

KPIs can be an important business set of business tools if used properly. Keeping objective data about whether your business is achieving its goals is the only way to plan for the future. But if used improperly, KPI tracking becomes just another corporate buzzword like the kind we've all seen before — the kind that inspire a couple projects that make a lot of work for everyone, but are never followed through on and never produce results.

Now that you've decided what metrics you want to track, it's time to think about following through on tracking the indicators you selected and how to use them to forecast the future.

Get a good set of data.

This one seems obvious, but you'd be amazed how many companies fall down at this hurdle. Generally, they fail in one of two ways: either someone gets so excited about a new indicator that they're tracking that they try to extrapolate off their new data after just a couple of months, or someone quits and their replacement decides to track completely different data but still wants to meet the old deadlines. Have patience, set reasonable schedules, and wait.

Make visuals.

It's been said that no one likes boring meetings with lots of charts, but boring meetings with lots of data tables are much worse. Looking at your data as a chart can help you see trends that you might otherwise have missed. And the best part is, with KPI tracking software, you don't need to mess around in Excel to get a good graph.

Look for patterns in your data.

Do your sales go down in the winter? Do you lose customers when the economy is bad, or employees when it's good? Think about what outside forces are affecting your numbers. Notice cyclical patterns and try to explain them. After getting good data, this is the second step in building a forecast model.

Do more research.

Once you've come up with a few possible factors that might be creating the data patterns you noticed, it's time to figure out what other information you'll need. Suppose, for example, that you think your sales fell last year because of a dip in the economy. That's fine, but what data are you going to put in your graph to represent "the economy?" You could use the employment rate, but do you want the national one or the state one? How will you account for discouraged workers, or the underemployed? Or you could go a different route and use stock market data, but which market will you use? And does the stock market matter if your average customer doesn't have investments? These decisions will have a serious impact on the results you get.

Gather historic data.

If the data you're using for influencing factors doesn't cover the same period as the data you've collected, you'll have a problem. Make sure you use an indicator that's been tracked by a reliable outside source for some time. Here's an article about how to find reliable data and how to filter and visualise it.

Use your data to build a model.

Now that you've done the hard work, it's time for the interesting part. You can use the information you've gathered to build a cost/benefit graph, a flow chart, or any kind of visual that will help you predict the future. Here's an article in Harvard Business Review that will give you some ideas about the fun you can have with your data, and here's one from statpac.com that has a useful bibliography if you're looking to read more about this fascinating subject. These days, your KPI tracking software will take the remaining hard work out of this part of the task, and usually give you plenty of options to explore, but it's still interesting to know what goes on behind the curtain.

Forecasting with KPIs takes work, when it's done right. But it's the only way to get reliable predictions, and the best way to make good decisions for your business.

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