The KPI ( Key Performance Indicator ) can be translated as a critical (key) indicator of progress towards an expected result. KPIs provide a focus for strategic and operational improvement, create an analytical foundation for decision-making, and help focus attention on what matters most.

We can't define a KPI without setting a goal and keeping track of it.

To minimize errors when setting objectives and goals, and making performance measurement and monitoring more accurate and relevant, we will use the SMART methodology.

The SMART (Specific, Measurable, Attainable, Relevant, and Timely) methodology will help us ensure that the KPIs or KPI reports are fit for purpose, relevant, and successful.

Before defining them, we must not lose sight of the fact that according to this methodology the KPI has to meet the following objectives:

Specific: clearly state what the purpose of the KPI is and what it is intended to measure. Being explicit means that everyone understands the objective and how it will be achieved;

Measurable - The main goal of any KPI is that it must be measurable.

Achievable - KPIs must be realistic. Being reasonable about your goals will help avoid disappointment.

Relevant - The KPI must be relevant to show performance towards the goal.

Timely - A time frame for the KPI keeps everyone focused on when the goal should be achieved.

We know that taking only these criteria into account when defining a KPI would not be enough if we did not add a SMARTER (Evaluate, Review) to this Methodology, that is, an intelligent KPI.

Evaluate: As objectives change, it is prudent to evaluate that the KPI provides the correct measures, or is still strategically aligned with the intended purpose.

Review: Occasionally, evaluations will determine the need to review KPIs.

KPIs help a company, department, team, or manager to react instantly to any event that may affect the business. Depending on the needs of each department, the following can be developed:

I. Economic / financial indicators - allow measuring income, expenses, costs, returns, benefits, level of debt, indebtedness, liquidity, solvency, among others.

For example, in the Income Statement, we extract valuable information for the economic-financial diagnosis. For them we look at:

The result - we have had profits or losses in the current year. If we have had losses, see the causes and if we have had benefits, try to quantify the % of profits on a goal that may be sales or previous years.

Cash Flow - shows us to what extent the income statement tells us does or does not generate cash/income. It also helps us to identify if the cash flow is sufficient to cover the investments and if the impact of the amortizations is sufficient. To see how the income was obtained in a period, we calculate the Operating Cash-flow (Net Profit + Amortization). Financially we will use it to see the company's ability to finance its debts, dividends with the resources obtained from ordinary activity. ( cash flow formulas :Net Cash Flow = Total Cash Inflows – Total Cash Outflows.

Turnover - growth, maintenance, or decline? Once you have seen the result, you have to analyze the causes or make the appropriate comparisons.

In the case of growth, buy with previous years to see the trends, see if the growth was real or due to exceptional causes, or if the growth is above or at the same level as inflation. In the case that the company registers a stagnation or decline, see the causes and the strategies to follow.

Selling costs - in the case of selling costs, we would have to analyze more or less the same, that is, growth, maintenance, or de-growth, and the causes that have produced these changes. Selling costs are directly related to gross margin, personnel costs, finance costs, or other operating expenses.

Profitability threshold - known as the deadlock or break-even point, this indicator indicates the sales figure at which the company neither profits nor losses to cover all its expenses or the numbers of products or services that we have to sell to cover the fixed and variable costs of the company. You can buy units or amounts that we have to sell every month/year/day to start making profits.

Operating or Exploitation Leverage - is used to study the impact of fixed expenses on operating profit in the face of the variation in the sales figure and consists of substituting variable costs for fixed costs. As a consequence, as more quantities are produced, the lower the cost per unit. In this way, an increase in sales will increase variable costs but not fixed costs.

In the case of the Balance Sheet, we could analyze various blocks of ratios: Liquidity and Solvency Ratios, Indebtedness and Financial Structure Ratios, Profitability Ratios, and Operating Ratios.

Liquidity Ratio - Current Assets / Current Liabilities. The optimal value of this ratio is between 1.5 and 2. A value lower than 1.5 indicates that the company has serious liquidity problems. A value above 2 indicates that the company has idle current assets.

Cash ratio - available + customers / current liabilities. Measures the ability of the company to meet short-term payments. The value of this ratio must be close to 1. If it is lower, the company has problems because it does not have liquid assets to be able to meet payments and if it is above 1, profitability would be lost.

Availability Ratio - available / current liabilities. This ratio indicates whether the company has enough available to cover short-term needs. The optimal value would be 0.3.

Indebtedness Ratio - this ratio indicates the proportion of the company's debt and helps us to diagnose the financial autonomy it presents from third parties. Traditionally, companies have to finance around 40% of their funds and 60% of debts. The optimal value is between 0.4 and 0.6. If it is higher, the company loses financial autonomy and if it is lower, there is an excess of its capital, which is why the company would gain profitability through debt.

Economic Profitability Ratio - is the relationship between profit before deducting interest and taxes and all business investment taken from average total assets. This ratio tells us if the growth of the company is accompanied by an improvement or deterioration of the result. The higher this indicator is, the better the investments are being managed as a whole. Your tax management should be good so that you can avail the benefits of getting better returns on paying taxes.

Total Asset Turnover Ratio - reflects the effectiveness of the company in managing its assets to generate sales. This ratio is calculated as total sales/assets. The higher this ratio, the better the profitability of the company. If the result is close to 1, we would interpret it that annually the company earns E 1 for each euro it has in assets.

Average Collection / Payment Term Ratio - this ratio indicates the average days of collection/payment of invoices. Through these two indicators, any company can prepare a more accurate treasury budget. Ideally, the average payment period should be longer than the average collection period, which means that we charge before we pay the invoices to our suppliers.

II. Commercial indicators - help us to know and improve our commercial activity. They are aimed at converting into sales and billing an item/service. For example, we could analyze the Customer Conversion Ratio / Lost Customer Ratios / Average Profitability per Customers / Average Volume of Closed Orders / Number of Returns.

III. Production indicators - help to identify production errors or defects and are the basis for continuous improvement within a company. In this section, we will be able to analyze the Average Cost of the Purchase Order / Compliance with Deadlines / Production Cycle Time / Quality Performance.

IV. Marketing indicators - allow measuring the performance of actions aimed at capturing leads. The Cost of Customer Acquisition / Conversion of Leads to Customers / ROI of Inbound Marketing.

Most companies start working with more than one indicator for the simple fact of being able to compare which is the most relevant and which one needs to work more on. It would be optimal to work with 3-4 indicators, but if you are currently working with more, what can be done is to assign a weight to each indicator when evaluating them. The one that achieves the least weight is the one that has the least importance/relevance for your company at that moment and therefore less effort must be used. This does not mean not to evaluate it every x time in case there is a strategic change in the company or the market.

When does the implementation of a KPI system work and when does it not work?

Normally it works when management is involved when the indicators are agreed upon and understood by all parties when responsibilities are well defined when we have a management system that allows us to obtain information in real-time, and when this information is always updated.

It does not work when management is not involved, when information is not entered in real-time, when indicators (the most relevant) have not been correctly defined, when it is not being implemented in all departments and, consequently, they have not involved all the employees.

To implement a system of progress indicators, it is necessary to try to integrate the general objectives of the company with the personal objectives of the employees, maintain the motivation of the employees, and have defined both the short term (at most 3 months) and the long term the objectives of the company.

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