Definition of KPI (Key Performance Indicator): Types, Factors and How to Apply
KPI or Key Performance Indicator is often used to assess the level of progress that has been achieved by an organization or company in order to achieve the company’s goals. So, what does KPI mean?
Well, on this occasion we will discuss completely all related matters about the sense of KPI or Key Performance Indicator or which in Indonesian is better known as IKU or the main performance indicator.
Definition of KPI (Key Performance Indicator)
The definition of KPI or Key Performance Indicator in the field of Science is an indicator that plays an important role in a company to assess the level of effectiveness of the company’s performance in achieving its objectives.
So, the definition of the KPI is simply a tool used to measure how well the performance of a company, work units, work projects, departments, or individuals in terms of achieving previous set goals strategically.
The presence of the KPI will help the company’s management and founder of the company to see the development of the company or work unit in it, whether all the activities carried out are in accordance with expectations or not maximally.
Some of the characteristics of key performance indicators or KPI are non-financial measures, frequently used sizes (regular measurements), sizes known by management, all parties in the organization know and understand key performance indicators, responsibility for individuals and teams, there are effects Significant, produce a positive effect.
Generally, every company has different KPIs between one with the others based on the company’s strategies, priorities, and criteria for the company. But if viewed essentially, the KPI can be used as a benchmark in assessing the company’s development, work units, individuals, or departments for the target previously determined.
Understanding of KPI based on experts
- Gabčanová iveta.
Gabčanová iveta in the Journal of Competitiveness argues that the sense of KPI or Key Performance Indicator is a measure of quantitative and gradual for companies and has a variety of assessments based on concrete data, and is used as a starting point in determining the purpose and developing company strategies.
- Jacques Warren
Jacques Warren said that the sense of KPI is an assessment to measure a company in conducting a strategic vision. The strategic vision refers to how a company’s strategy can be interactively integrated and thoroughly.
- David Parmenter
David Parmenter explained that KPI or Key Performance Indicator is a measurement tool that is most important for the success of a company at the moment and the future.
- Jyoti Banerjee and Cristina Bueti
Banerjee and Bueti in his book said that the sense of KPI or Key Performance Indicator is a scale and quantitative assessment used to be able to evaluate the company’s performance in terms of achieving the company’s goals. KPI can also be used to determine a measurable objective, monitor trends, and policy making for the company.
2 major indicators in KPI
In general, it is divided into the main type, namely the Financial KPI and non-financial KPI.
Financial Key Performance Indicator (KPI)
The definition of financial KPI is a type of KPI related to the field of finance. The following are some examples of financial KPIs:
- KPI Gross Profit or Gross Profit, is an indicator used to measure the amount of money left of income or post earnings reduced by HPP or cost of goods sold.
- KPI Net Profit or Net Profit is an indicator used to assess the amount left of the company’s revenue after being reduced by HPP and other costs such as interest and tax.
- KPI Margin Profit Margin or Gross Profit Margin, is an indicator to assess the percentage that can be achieved by dividing the company’s gross profit with the company’s income.
- KPI Net Profit Margin or Net Profit Margin, is an indicator used to assess the percentage obtained by the company by dividing net income based on company income.
- KPI Current Ratio or Current Ratio, is an indicator used to assess financial balance sheet finances by dividing the company’s current assets with the company’s smooth liabilities.
Non-Financial Key Performance Indicator (KPI)
The definition of non-financial KPI is an indicator tool that is not directly able to influence financial or organizations, but can still affect the performance of the company’s organization. Some of the things that are classified as non-financial KPI are the level of labor turnover, customer satisfaction matrix, repeated customer ratios for new customers, and market share.
Factors that must be considered in making KPI
KPI or Key Performance Indicator will not be useful if it is not accompanied by follow-up on the KPI. In the process, a company is able to make KPIs that have been tailored to the company. But in general, KPI must be made based on several points that are often applied in various industries, these points are SMART (specific, measurable, attainable, realistic, timeless).
The five points are very important to determine a particular goal. The following is a complete explanation of Smart Points above:
- Specific. Companies must specify the company’s goals specifically and are easily understood by other members.
- Companies must be able to measure the achievement of this goal.
- Companies must ensure that the aim can be achieved properly.
- Companies must ensure that purpose is appropriate or relevant to the company.
- Time frame. The company must also determine the period of achieving this goal.
Implementation of Key Performance Indicator (KPI)
Before a company implements KPI into its operational activities, there are 4 basic criteria that the company must fulfill. First, the existence of collaboration between the employees, teams, suppliers with the customer. Second, decentralization from the management to the operational party. Third, the existence of integration or linkages between reports, measures, and activities. Fourth, the existence of KPI relations with the company’s strategy.
It is necessary to have interconnected systems in implementing KPI, both from corporate environments such as managers, investors, and caruwan, to outside parties such as suppliers and customers.
Even the same as the report. The KPI report must be made in a timely, efficient and must focus on increasing in terms of decision making. The most important thing in implementing KPI is to explain the results or objectives of each KPI.
There is an important method to be able to apply the KPI appropriately to achieve the company’s goals. The method will combine the SMART criteria that we have explained above. The following is the method.
- Specific: Objectives or results must be made clearly and specifically, so the purpose does not spread to other things that are not in line with expectations. When being able to achieve specific goals or results, it will be easier to know when to achieve that goal.
- Measurable: This goal must be measured in quality and quantity. This can be conditioned on the standard performance or expectations of a company.
- Achievable: The aim must be achieved to be formulated as one of the challenges, so that it will inspire the company more in achieving its objectives.
- Realistic: In addition to being able to achieve, the company’s goals must also be realistic and results oriented.
- Time Sensitive: Every purpose or results must have a time limit for when to achieve these goals or results. The fact that this goal is something that requires time limit will give birth to ease in assessing an increase in the next goal or results.
Based on the explanation above, we can draw the conclusion that the sense of KPI or Key Performance Indicators is a tool used in a company activity to measure and assess the company’s performance every time.
This calculation is used to determine the level of corporate development in the company’s activities. KPI is also often used as a financial comparison tool and company performance on other businesses or business competitors.
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