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Understanding KPI (Key Performance Indicator) and Its Benefits in the Company

Timesofummah.comIn a management, the role of control and evaluation has a very important function in ensuring an organization’s work plan can be implemented optimally. A good organizational work plan will of course ultimately be the ultimate goal of the organization to be realized properly as well. Therefore, a management that carries out control and evaluation is usually called a KPI or Key Performance Indicator.

A performance management system that can run well is usually able to be a representation of a comprehensive business process in the organization. Key Performance Indicators have a role to measure the performance management system, whether it is running successfully or not being able to run according to plan.

In addition, Key Performance Indicators have several measures to describe the performance of a management system related to the organization as a whole to its relationship with its various parts. Currently, many companies already have a performance management system, but it only contains a “list of KPIs” so they may not pay too much attention to the relationship between indicators.

In the last ten years alone, performance management systems such as the Balanced Scorecard or commonly referred to as the BSC began to emerge to try to accommodate each indicator that has a relationship and interrelationship. In the balanced scorecard itself, the relationship between each indicator is only described qualitatively.

If the relationship between these indicators can be described quantitatively, it is possible that the performance measurement model can be applied for more definitive and specific purposes. One example of a more definitive and specific performance measurement model is carrying out repair programs or programs to make predictions on system behavior in the future.

A. Definition of KPIs (Key Performance Indicator)

Understanding KPI (Key Performance Indicator) and Its Benefits in the Company

KPI or Key Performance Indicator can be understood as a measuring tool used to create a picture of the company’s effectiveness in achieving its business goals. The company itself usually applies Key Performance Indicators to measure the success of its achievement targets.

From this explanation, it can be determined the characteristics of the Key Performance Indicators based on non-financial measures, including:

a. Frequently used measurements (Regular measurements)

b. Sizes known to management

c. Everyone in an organization has understood and understood KPIs

d. Responsibilities to individuals and teams

e. Has a very significant effect

f. Have a positive effect

In its application, Key Performance Indicators can be measured in daily, weekly and monthly periods. A good Key Performance Indicator is basically something that has an important role and consistently gets the attention of management. When a member of management deviates from the Key Performance Indicator, the management can decide on an action by calling the person in charge.

B. Understanding KPIs According to Experts

1. Iveta (2012)

According to Iveta (2012), Key Performance Indicator or KPI can be defined as a measure that has a quantitative and gradual nature for the company. This measure contains various perspectives and is based on concrete data analysis, as well as being the starting point for determining goals and formulating organizational strategies.

2. Warren (2011)

According to Warren (2011), Key Performance Indicator or KPI has the meaning as a measurement used to assess how an organization implements a predetermined strategic vision. The strategic vision itself can mean objectives which refer to how the organization’s strategy can be interactively integrated into the overall strategy of the organization.

3. Parmenter (2007)

According to Parmenter (2007), Key Performance Indicator or KPI has a definition as something that is most critical to realizing a successful organization now and in the future.

4. Banerjee and Buoti (2012)

According to Banerjee and Buoti (2012), Key Performance Indicator or KPI is something that is used to measure scale and quantitatively to evaluate organizational performance when trying to realize predetermined organizational goals and targets. KPIs themselves can be applied to create measurable objective policies, analyze trends, and support decision making.

C. Benefits of KPIs

KPI or key performance indicator can also be something that has the most effective criticality in realizing an organization or company to be successful, both for now and for the future. Well, here are some of the benefits of KPIs for employees, including:

1. Provide references for companies to get qualified employees.

2. Employees become much easier to measure and evaluate employee performance and reduce certain elements of subjectivity.

3. Employees become more aware of what management expects of them

4. Employee performance results become much more measurable and good

D. Types of KPIs

Broadly speaking, Key Performance Indicators or KPIs can be divided into two types, namely Financial KPIs and Non-Financial KPIs. The following is an explanation of the two types of KPIs, including:

1. Key Performance Indicators Financial

The first type of Key Performance Indicator is the Financial KPI. Financial KPI itself can be regarded as a key performance indicator that has a relationship with finance. Some examples of Financial KPIs that need to be considered are as follows:

a. KPI Gross Profit (Gross Profit)

Financial KPI type gross profit is a KPI that can be used to measure the amount of residual money from income. With a note, the amount of remaining income has been reduced by the Cost of Goods Sold or often referred to as HPP.

b. KPI Net Profit (Net Profit)

Financial KPI type net income, namely KPI which is usually applied in measuring the amount of remaining money from income and has been deducted by Cost of Goods Sold as well as several other business costs, ranging from interest costs to taxes.

c. KPI Gross Profit Margin (Gross Profit Margin)

Financial KPI type gross profit margin can be intended as a KPI that can be used to measure the percentage value obtained by dividing Gross Profit and Revenue.

d. KPI Net Profit Margin (Net Profit Margin)

Financial KPI type net profit margin has a purpose, namely as a KPI that is used to measure the percentage value obtained with the provision that the net profit has been divided according to income.

e. KPI Current Ratio (Current Ratio)

Financial KPI type current ratio can be said as KPI that can be applied to measure the financial performance of the liquidity balance by dividing current assets or current assets with current liabilities or current liabilities.

Financial or financial indicators are commonly used to predict the effectiveness of a business that will survive when it experiences a sudden decline.

2. Non-Financial Key Performance Indicators

Basically, Non-Financial KPIs are KPIs that can indirectly affect the financial situation of a company. The following are some examples of Non-Financial KPIs that need to be considered, including:

a. Labor Turnover (Manpower Turnover)

b. Customer Satisfaction metrics (Customer Satisfaction metrics)

c. The Ratio of Repeat Customers to New Customers (Repeat Customer to New Customer Ratio)

d. Market Share (Market Share)

E. Factors Affecting the Effectiveness of KPIs

KPIs have a very important influence if there is a follow-up to the previously determined KPIs. In some cases, it is found that companies usually adopt the most popular KPIs used in an industry. However, after the KPI is implemented in the company, it will raise many questions about why the KPI does not reflect or describe the company’s performance.

In developing a strategy for the preparation of Key Performance Indicators, you are required to have team members who are able to see various things about the company. Some of these include questions about what the organization’s goals are, how it plans to achieve them and who has the right to take action based on the information that has been obtained.

Determination of Key Performance Indicators should be a continuous and iterative process involving input from analysts, department heads and of course managers. After that, you and your team can get a better and more effective understanding while answering two questions, namely, how do the Key Performance Indicators measure a company’s business processes and who has the right to follow up on the company’s business processes.

One way to create relevant Key Performance Indicators is to use SMART criteria. SMART itself is an abbreviation of several words, namely specific, measurable, attainable, relevant, time-bound. Well, here is an explanation of five things that factor into KPIs based on SMART, including:

1. What are the company’s specific goals.

2. Can you measure the achievement of the goal.

3. Is the goal achievable.

4. Is the goal related to the company.

5. How long will it take to achieve the goal.

F. Application of KPIs within the Company

In implementing Key Performance Indicators in a corporate organization, there are 4 basic criteria that need to be met before an organization can state that they have successfully implemented KPIs in the company’s operational activities. The explanation of the four criteria is as follows:

1. Collaboration between employees, teams, suppliers and customers

2. Decentralization from management level to operational level

3. Integration or linkage between measures, reports and actions

4. KPI relationship and strategy

In order to implement Key Performance Indicators properly and optimally, it is necessary to have a system process that is interrelated, both from the organizational environment in building a comfortable atmosphere such as employees, managers, and shareholders as well as various other external stakeholders, such as customers and suppliers. This also needs to be applied at the time of reporting, which reports must be disciplined, efficient, and focused on improving decision making.

When implementing and applying Key Performance Indicators, one of the things that needs to be considered is about defining the results or objectives of each KPI or key performance indicator. Not only that, in applying Key Performance Indicators there is a method commonly used in determining planning goals. This method is a method that uses SMART criteria (Specific, Measurable, Achievable, Realistic and Time Sensitive).

Well, here is a SMART explanation that needs to be considered, including:

1. Specific

The objectives or results when implementing the Key Performance Indicators should be clear and specific. This is because the existence of general or broad goals or results can result in applications that cannot be optimal and tend not to be expected. When the goals or results have been clearly and specifically defined, it will be easier to know when the goals or results can be achieved.

2. Measurable

Measurable or can be interpreted as a measure has a definition as a goal or result that can be measured. In determining goals or results, it is very important to measure, both in terms of quality and quantity. Appropriate measures can be placed in determining the relationship to performance standards or expectations of performance.

3. Achievable

Achievable or means the fastest has a very important role when implementing Key Performance Indicators. The application of KPIs should be created based on the challenges faced by the organization or company. This will be very influential because it can inspire the organization to realize the best results or goals.

4. Realistic

In implementing Key Performance Indicators, it must be based on realistic thinking. In creating an idea in the form of results or goals that must be achieved, the steps that need to be taken are realistic and result-oriented thinking.

5. Time Sensitive

In implementing Key Performance Indicators, each result or goal has a time limit that will be agreed upon by the organization as a whole. This is done so that all parties can be motivated to achieve the goals or results according to the deadlines and compact. The fact that the goal or result is essentially something that requires a time limit can create an ease in measuring an increase in a particular goal or subsequent outcome.

G. Example of KPI Analysis of a Company

In developing Key Performance Indicators it takes time and company resources. Key Performance Indicators that are measured are usually indicators that have been adjusted to the needs of the company. In addition, the measurement has also taken into account the company’s short-term strategy and objectives.

An example of the development of a Key Performance Indicator, for example, is when a company gets a satisfactory increase in sales figures, but the profits obtained by the company are not sufficient to provide an allocation of funds for the benefit of business growth, the Key Performance Indicator that is almost certain for the company is the Profit Margin KPI. Net and Gross Profit Margin.

This example can be seen based on what is found in the financial or accounting reports of trading companies registered with the company. On the one hand, if profits are in line with expectations and the company’s growth is not as fast as targeted. So, the thing that needs to be done is to consider several non-financial KPIs, be it the labor turnover KPI, customer satisfaction KPI, or it could be the ratio of repeat customers to new customers.

This is a discussion of KPI or Key Performance Indicators. Hopefully you can understand the meaning of KPI in depth so that it can be applied to your company.

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