Performance indicators (PIs) are nonfinancial. These are a type of performance measurement. This kind of indicator helps companies to equalize their company's strategy. These indicators are often named Key Performance Indicators but KPIs have fundamental meaning to the organization's prosperity (D.Parmenter 2019, p.13). KPIs assess the progress of an institution or of a special activity in which it interests. Key performance indicators are the vital navigation tools used by managers to know whether their company is on a prosperous journey or whether it is swerving off the flourishing direction. The best choices of indicators will reflect enlightenment on performance and highlight sections that demand concentration. There are two of the most common proverbs used to highlight the important value of metrics. According to B.Marr ":
- What gets measured gets done
- If you can't measure it, you can't manage it
Without the right, KPIs managers are sailing blind" ( B.Marr 2014, Introduction chap.).
Performance indicators for the private sector and government
Performance indicators should include various factors. These are different depending on their areas. According to D.Parmenter: "For the private sector, performance indicators could include:
- Abandonment rate at call center - callers giving up waiting
- Late deliveries to other customers ( excluding key customers )
- Planned abandonments of reports, meetings, processes that are no longer functioning
- Number of innovations implemented by each team/division
- Sales calls organized for the next week, two weeks, and so forth
- Number of training hours booked for next month, months two and three, and months four to six - in both external and internal courses
For government and nonprofit agencies, performance indicators could also include:
- Number of media coverage events planned for next month, months two to three, and months four to six
- Date of next customer focus group
- Date of next research project into customer needs and ideas" (D.Parmenter 2019, p.13).
Methods of checking the functioning of the indicators
There are several methods to check the correctness of performance indicator system like (F.Franceschini, M.Galetto, D.Maisano 2018, p.171-172):
- Smart test is a bargain on five dimensions like specific, measurable, attainable, realistic and timely.
- The "Three criteria" test relies on checking three criteria: strategic, quantitative and qualitative.
- The Treasury Department Criteria test is based on verification: data, indicator, and measurement.
Four types can be mentioned among performance measurements and there are (D.Parmenter 2015, p.4):
- KRIs - Key result indicators show the overall result of changes taking place in the company.
- RIs - Result indicators tell supervision how the partners come together to get results.
- PIs - Performance indicators show management what groups are giving.
- KPIs - Key performance indicators show management how the company is changing during critical success determinants (D.Parmenter 2015, p.4).
Examples of Performance indicators
- Return on Investment (ROI): This financial metric measures the profitability of an investment or business relative to the amount invested. It is calculated by dividing the net income of a company or investment by the original capital cost. For example, if a company invests $100,000 in a new project and it generates a net income of $20,000, the ROI would be 20%.
- Earnings per Share (EPS): This metric measures the amount of profit that a company generates per share of its stock. It is calculated by dividing the company's net income by the total number of shares outstanding. For example, if a company has 10 million shares of stock and its net income is $20 million, the EPS would be $2 per share.
- Cash Flow: This metric measures the amount of cash coming into and out of a company. It is calculated by subtracting the total amount of cash outflows from the total amount of cash inflows over a given period of time. For example, if a company has $10 million of cash inflows and $5 million of cash outflows over a one-year period, its cash flow would be $5 million.
- Debt to Equity Ratio: This metric measures the amount of debt that a company has relative to its equity. It is calculated by dividing the total amount of debt by the total amount of equity. For example, if a company has $10 million of debt and $20 million of equity, its debt to equity ratio would be 0.5.
Advantages of Performance indicators
Performance indicators can be incredibly helpful tools for financial management. Here are several advantages of using performance indicators:
- Performance indicators can offer a comprehensive and accurate representation of a company's financial performance. They are a way to measure a company's performance over time, allowing managers to identify areas that need improvement, and to recognize successes.
- Performance indicators can assist in budgeting and forecasting. Through the use of performance indicators, managers can better plan for the future, as they are able to identify trends that may have an impact on the company's financial performance. This is especially beneficial when making long-term decisions.
- Performance indicators can help managers to identify areas of risk and opportunity. By measuring key performance indicators, managers can anticipate and plan for any potential risks or opportunities that may arise.
- Performance indicators can help to identify and measure the success of financial strategies. By analyzing performance indicators, managers can determine whether or not financial strategies are working, and make necessary changes as needed.
- Performance indicators can provide valuable insight into market trends, customer preferences, and competitive dynamics. Through the use of performance indicators, managers can quickly understand the current market conditions and adjust their strategies accordingly.
Limitations of Performance indicators
The use of performance indicators can be a great tool for financial management, but there are a few limitations that should be taken into consideration. These limitations include:
- The potential for misinterpretation of performance indicators due to the lack of context. Performance indicators can be easily misrepresented if the data is not presented in the right context.
- The difficulty of comparing performance indicators across different industries and organizations. Different organizations may utilize different methodologies and metrics when measuring performance, making cross-industry comparisons difficult.
- The potential for using performance indicators as a substitute for sound financial management. Performance indicators should be used as a supplement to traditional financial management techniques, not as a replacement.
- The potential for performance indicators to be used to mask underlying problems. Performance indicators are only a snapshot of the company's current situation and may not accurately reflect underlying problems that may arise in the future.
The following are the other approaches related to Performance indicators:
- Key Performance Indicators (KPIs): KPIs are metrics used to measure the performance of an organization and its processes. They measure the success of an organization against its stated objectives. KPIs are widely used to measure performance, monitor progress, and set goals.
- Balanced Scorecard (BSC): The Balanced Scorecard is a measurement system that takes into account financial, customer, internal business process, and learning and growth perspectives. It provides a holistic view of an organization’s performance and can be used to identify areas for improvement.
- Return on Investment (ROI): ROI is a financial metric used to measure the profitability of a business or project. It is calculated by dividing the net profit by the total invested amount and expressed as a percentage.
- Earned Value Management (EVM): EVM is a project management methodology used to measure performance and progress. It is based on comparing actual results to those that were planned, and takes into account both cost and time.
In summary, other approaches related to Performance indicators include Key Performance Indicators (KPIs), Balanced Scorecard (BSC), Return on Investment (ROI), and Earned Value Management (EVM). These methods help organizations measure and improve their performance.
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Author: Paulina Zając