Financial analysts create goals and translate them into actionable plans. Part of the process is using key performance indicators, or KPIs, to assist companies in measuring the effectiveness of the organization in reaching their goals.
KPIs are used by everyone throughout the company to provide context by which to measure performance.
What is a KPI?
A KPI is a financial metric that provides a quantifiable value by which to measure a business’s results and performance against.
They can be used to provide relevant information regarding sales, expenses, profit, cash flow, and overall health of the business. This information is then used to make decisions on how to better optimize a business’s operations to reach its financial targets and make it the primary focus when making decisions.
One of the primary functions of a financial analyst is to monitor and analyze the performance of a business. In doing this, analysts require some form of measurement to gauge whether the business is operating well or has a need for improvement.
Furthermore, analysts require some form of context to measure the business against the overall industry that it operates within. For example, if gross profit is a certain percentage across the industry as a whole, the business should strive to achieve that average or better.
KPIs help to not only provide context but also guide in understanding how the business is performing relative to its goals.
Why KPIs are important?
KPIs are important because they help keep the organization aligned around the goals and objectives and are a critical component of performance management.
The performance management process of monitoring results requires some form of relevant metric to compare actual results to. KPIs provide these targets and help to ensure that the performance of the organization achieves the targets established.
KPIs convey relevant information that can be used to correct business activities when they are deviating from the plan or can indicate when adjustments might be required to forecasts.
Another benefit of implementing relevant KPIs is that they serve to provide employees and staff with a personal target. When achieved this can have profound impacts on morale and provide a sense of ownership that helps strengthen accountability.
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