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The magic number of KPIs for budgeting

June 27, 2013
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Have you ever worked with someone who told you “everything is a priority?”  Don’t you want to channel “The Princess Bride” and inform them, “I do not think that word means what you think it does.”

Well, KPIs can be like that too – if you consider nearly every metric a KPI.  At that point, you’ve lost the “key” out of “key performance indicator.”

What are KPIs?

Key performance indicators – or KPIs – are used by organizations to evaluate their success with a specific measure.  KPIs can be “big picture” – like the number of new customers acquired – or they can be much more granular, such as the profitability of customers by specific demographics or segmentation.

The challenge is determining what to measure.  An organization will want to set many different metrics, but not every metric should be considered a KPI.  While a metric can really be anything that can be measured, a KPI needs to be strategic and directly related to value drivers in the organization.

How to Choose Your Business’ KPIs

Like any other number in a budget, forecast or reforecast, KPIs must be based on verifiable, trusted data.  The last thing an organization needs is to base strategic decisions on numbers that are inaccurate.

Common KPIs include:

  • Sales by product
  • Operating expenses
  • G&A expenses
  • Payroll and PRE
  • Cost of goods sold
  • Labor
  • Materials
  • Sales expenses
  • Marketing expenses

These are just a handful of KPIs some organizations track and respond to.  In reality, any organization can have a number of KPIs for each division and department.  For example, a business may want to measure and understand KPIs for its sales department, such as sales by product, overall sales growth, sales by demographics, sales per rep, close ratios, number of opportunities, sales by channel, average sales price, and more.  That’s at least eight KPIs just for one department.  At what point are these numbers really just metrics and not actually key performance indicators?

Nick Castellina, senior research analyst, Aberdeen Group, was asked how many KPIs should an organization track.  Nick’s response was best-in-class organizations that have 15 or less KPIs create more accurate plans, budgets and forecasts.

Tracking 15 KPIs means they truly are key performance indicators, not just metrics.

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