What are KPIs – and what are they used for?

Key Performance Indicators (KPIs), also known as key metrics, are measurable values that over a defined period of time, show how effectively a business is achieving its key objectives. By implementing and tracking the right KPIs, it becomes easier to understand whether the organisation is developing in the desired direction. In this article, we explain what KPIs are and provide examples of how Azets works with KPIs in its own service delivery.

Sometimes it may feel as though things are going well – but what kind of success is it, and compared to what? You likely already know what can be measured within your business, but identifying which of those metrics matter most can be challenging.

The first step is to determine what is most critical for your company’s survival and growth, and then identify which metrics are relevant to that. You can then define KPIs by combining and relating these metrics to one another. Once KPIs have been implemented, you can set relevant targets, develop strategies to achieve them, and build a track record that allows you to monitor and evaluate performance over time.

KPIs can be seen as different perspectives that, when combined, tell one coherent story. Financial metrics provide an overview of the company’s overall financial position, such as revenue, profit and cash flow. These indicators answer the question: how are we performing financially?

Profitability metrics show how much profit the company generates in relation to certain factors, such as profit margin and return on equity. These indicate how effectively the business generates profit.

Finally, efficiency metrics illustrate how effectively the company uses its resources, for example revenue per employee or inventory turnover.

Common KPIs

Examples of commonly used KPIs include:

• P/Eratio (price-to-earnings) – used to assess how highly a company is valued by comparing its share price to its earnings per share.
• Equity ratio – showshow much of the company’s assets are financed by owners’ equity rather than external funding. Calculated as equity divided by total assets.
• Liquidity ratio – indicates short-term payment capacity, often calculated as (current assets – inventory) / current liabilities.
• Operatingmargin – operating profit in relation torevenue.
• Inventory turnover – measures how quickly a company sells and replaces its inventory, typically calculated as cost of goods sold divided by average inventory.

Leading and lagging KPIs

KPIs are often divided into leading and lagging indicators. Lagging KPIs measure the extent to which a company has achieved its targets – they reflect outcomes that have already occurred. Leading KPIs, on the other hand, measure factors that can be directly influenced and that drive future results, helping to steer development in the right direction.

Most organisations primarily track lagging indicators, which is not wrong – but these should be complemented by leading indicators. The aim is for leading KPIs to help predict the outcomes reflected in lagging KPIs, and thereby indicate whether key objectives are likely to be met.

Examples:

• Share of support cases resolved within agreed time (leading) – Customer satisfaction (lagging)
• Share of invoices issued relative to orders placed (leading) – Cash flow (lagging)

How do we know which KPIs are right for our business?

A common mistake is to choose metrics that are easy to measure rather than those that are important to influence. The right KPIs are those that most clearly indicate whether you are progressing towards your goals.

Start with your strategy and what you are trying to achieve. From there, identify the behaviours or outcomes that drive that goal. Only once this is clear should you define your KPIs.

How many KPIs should you have?

KPIs should only be used to measure what your business considers its most important activities. Too many KPIs can lead to a loss of focus and unnecessary administration that few engage with.

The key is to select KPIs based on what you need to control, rather than what is considered “standard”. A good starting point is typically 3–5 KPIs, including one liquidity metric, one or two profitability metrics, and one efficiency metric.

How should KPIs be interpreted when performance declines?

A KPI trending in the wrong direction is valuable information, not a failure. The key is to determine whether it is a symptom or the result of a root cause. What in the business may have influenced the outcome?

It is also important to always interpret KPIs in combination with others. A single metric rarely provides the full picture. The goal is not to react quickly, but to react correctly.

How we use KPIs at Azets

At Azets, we have extensive experience working with KPIs – both in supporting our clients’ financial development and in measuring the quality of our own service delivery.

In addition to the financial KPIs we produce and report on for our clients, we also use KPIs to measure various aspects of our operational performance.

Examples of KPIs:

• Number of supplier invoices paid on time in relation to total invoices
• Number of payment reminders issued in relation to total invoices
• Time from invoice receipt to readiness for payment
• Number of asset capitalisations completed according to schedule
• Share of electronic invoices
• Share of automatically matched invoices
• Response and resolution time for deviations and incidents

We always define clear KPI targets, analyse outcomes, and identify improvement areas to achieve agreed performance levels. This should ideally be done collaboratively between you as a client and your Azets contact, ensuring a shared understanding of goals and expectations.

What KPIs have you set for your business? Reviewing them may provide valuable new insights. If you are unsure, please feel free to get in touch – our experts will be happy to support you.