We all like to know how we are doing, whether in our personal life or businesses. Key Performance Indicators or their acronym KPIs help us achieve that purpose. They are everywhere, even though we might not notice them as such (Your kids’ grades or your degree GPA). KPIs are measures or indicators that support tracking something we are interested in. The indicators are as varied as life itself since they are a proxy to track reality in order to assess progress, set targets, identify performance, compare our progress or numbers again competitors (benchmarking), and much more. KPIs are critical tools in the repository of leaders.
I have a disclosure to make. I love KPIs. Without KPIs, we are mostly blind and won’t know whether we are making progress or rotting. Well-designed KPIs are quantitative, meaning they quantify reality numerically so that we can understand its evolution over time. Additionally, KPIs can be of two types regarding their time component or time to change, leading or lagging indicators. Leading indicators change quickly and estimate future outcomes by measuring processes. On the other hand, lagging indicators slowly change since they measure an outcome.
For example, say I wanted to lose weight. My weight would be a lagging indicator since it takes considerable time to change substantially, say 5% or 10%. This change could take months and is the outcome of a process. On the other hand, I can design and measure the calories I ingest daily and expend per day to compute my net calories. The net calories per day is a leading indicator since I can calculate it daily and having a consistent negative value of net calories per day will make me lose weight in the long term. Suppose I consistently track the leading indicator ensuring it remains negative over time. In that case, I can be confident that I will eventually see a change in the lagging indicator of my body weight.
Here’s another example. Let’s say a sales team wanted to increase their monthly sales revenue. You can see how monthly sales revenue is a lagging indicator since they need to wait a month to close the figure. On the other hand, we can design leading indicators that are actionable. Hence, the team is on top of their numbers, and changes in the leading indicator would eventually materialize as changes in the lagging indicator. The business hires me as CEO, and I “suggest” we start tracking the sales team, number of calls, number of sales, conversion rate, and deal size per day. You can see how increases in daily calls, sales, conversion rate, and deal size would materialize in more monthly sales revenue and vice versa. It would be almost impossible to make more calls, more sales, increase the deal size and have a lower monthly sales revenue figure.
KPI design and implementation is an art and a science. One gains experience in it through practice. I have seen great examples of irrelevant and masterfully crafted KPIs in my work experience as an analyst and leader. In both cases, their impact is enormous. I will leave you for now with some KPIs I love. Some of them are lagging, and others are leading indicators.
Net burn rate is the difference between inflows and outflows of cash. When the result is negative, meaning more outflows than inflows, we call it burn rate since we are burning money. Notice that I wrote cash, not revenue or expenses. Cash is king. Although they are related, there’s a time component to it. You might sell a product or service today but get paid in six months, and that won’t be helpful for you today if you are about to go bankrupt (approximately 80% of startups die due to running out of money). It is a term commonly found in business settings, particularly startups. However, we could use it for our personal life too (when we don’t make ends meet), and there’s a similar one for public affairs and governments, called deficit.
Runaway is the time measured in months a business can run without going bankrupt (running out of cash). It is computed by dividing the business’s available cash by the burn rate. So, if the company has 1M€ in cash, its bank accounts and a 100k€ burn rate. Its runway is 1M€/100k€ equals ten months. This KPI is valuable too in our personal lives. How long can your cash reserves sustain your lifestyle if you lose your only income source?
Active users are the number of unique users interacting with a product or service in a given period. You could see it written as Daily Active Users (DAUs), Weekly Active Users (WAUs), and Monthly Active Users (MAUs), among others. I like this KPI since it gives a quick overview of a product or service usage and because it is easy to compute, and we can derive other KPIs from them, such as DAU/WAU, DAU/MAU, WAU/MAU ratios, which are extremely useful for stickiness and churn analysis.
Annual Recurring Revenue (ARR) is the annual recurring revenue for a product or service. This KPI is usually measured for subscription-based products or services where users subscribe and are charged frequently. The same amount of revenue for the same period is usually considered more valuable if it is recurrent than if it is not since it is assumed that many subscribers will pay again for it by default. Although it is less common, you could also see it written as MRR for Monthly Recurring Revenue.
Vocabulary. You might want to know the most important vocabulary and concepts regarding KPIs. Here are some I consider critical to understand: indicator, performance, lagging indicator, leading indicator, benchmark, benchmarking, input, output, process, project, target, baseline, outcome, result, metric, measurement, business intelligence, strategic measure, operational measure, project measures, employee measures, risk measures, objectives and key results (OKRs), strategic planning, performance management, scorecard, dashboard, data, data analysis,
I hope you found this article valuable made you think. Please let me know in the comments if that was the case or reach out to me to complain or give feedback if you wish 📩 Remember that recognition is fuel for people. If you want to encourage me to keep posting and publishing, please like, subscribe, and comment so that you can influence my KPIs to keep me engaged 😎
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