KPIs and management reporting

A metric is anything you can measure. A key performance indicator (KPI) is one of the few metrics that tells management whether the strategy is working. The test of a KPI is whether a change in it would make someone act.

Start from the business model. Ask how the business makes money and what drives it, then pick a handful of measures across the chain: - An online retailer like Pinecrest Outdoor Gear: traffic (sessions), conversion rate (orders ÷ sessions), average order value (revenue ÷ orders), gross margin %, customer acquisition cost, repeat-purchase rate and inventory days. - A subscription business: subscribers, churn, revenue per subscriber, acquisition cost relative to customer lifetime value. - A professional-services firm: utilisation (billable ÷ available hours), realised rate per hour, work-in-progress and lock-up days. - A manufacturer: capacity utilisation, yield or scrap, on-time delivery, cost per unit.

Balance the set. Mix lagging indicators (results: revenue, margin, profit) with leading indicators (things that move first: traffic, pipeline, conversion, customer satisfaction). Mix financial and non-financial. Keep it short — a dashboard of forty KPIs has no key ones.

Define them precisely and keep the definitions stable: what's in the numerator and denominator, gross or net of returns, which period. A KPI whose definition drifts can't be trended. Compare each KPI with something meaningful — budget, forecast, prior period, same month last year — rather than an outside "benchmark" whose definitions you can't verify.

Define cost KPIs fully. Customer acquisition cost, for example, is often quoted on paid media spend alone; a fully loaded figure adds sales salaries, agency fees and promotional discounts given to first-time buyers. Either can be useful, but say which one you use and compare it with the gross profit a customer generates over their life, not with the first order.

Beware gaming. When a measure becomes a target, people optimise the measure: chasing conversion with deep discounts, or cutting acquisition cost by stopping marketing. Pair measures that keep each other honest (conversion and gross margin; growth and acquisition cost).

The monthly report should fit on a page or two: a headline of what matters and why; a KPI table against plan and prior period; short variance commentary on the significant items; the updated forecast; and the decisions or actions required.