What Is a KPI?
Key Points
- KPIs guide company strategies and reveal needed improvements.
- Investors use KPIs to evaluate company performance and future potential.
- Various KPI types include financial, customer experience, and sales metrics.
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Whether you're running your own business or you're considering investing in one, it's important to consider the company's KPIs.
What is a KPI? It's some of the most essential data about how the company is performing. Read on to learn more.
If you've been in the business space long, you've almost certainly heard of KPIs, otherwise known as key performance indicators. KPIs are valuable metrics that help a company determine if it's headed in the right direction -- and, if not, the areas that need improvement.
As valuable as KPIs are to business owners, they're also very important to investors, who rely on accurate KPI reporting to determine if they want to continue to invest in a company. KPIs can say a lot if you're able to understand what they're telling you.
KPIs are not generally considered to be standardized metrics – they can literally be anything that the company believes needs to be tracked and that will provide important insight into its performance. They can also speak to potential improvements.
For example, same-store sales are an important measure of how well or poorly a location is doing. But they can also point to problems that can be fixed (or not). If you know that Store 57's same-store sales have been dropping by 10% consistently each quarter, you know the store needs a good review, even if overall profits are skyrocketing. If the problems that this KPI are pointing out are fixable, then you can use other KPIs to help fix them. If it's a case of a neighborhood demographic shift, it might make more sense to close the store and sell the building to a brand that's a better fit.
KPIs generally fall into several different categories, each with a great deal of value and lending a unique perspective to the overall picture. These are:
As important as KPIs are internally, they're at least equally important to investors. A company's KPIs tell a story about how the company is doing – but more importantly, what it's doing to either maintain or improve that situation. If a company isn't tracking KPIs, or isn't tracking KPIs that are relevant to a chronic issue, then that company isn't doing a very good job of managing itself.
Companies aren't obligated to publish all their internal KPIs, but some will consistently be tracked for investors, like same-store sales. It's through this data that a company can really know itself, in the same way an investor can know the company. A company that's not tracking important KPIs is running blind, and expecting investors to invest blindly, as well.
For most investors, especially those with longer time frames, there's comfort in knowing the company ensures that their investment dollars aren't wasted and that both investor and company can grow together over the long term.