Business software glossary
KPI
Key performance indicator
A KPI (key performance indicator) is a number you track regularly to see whether your business is moving towards a goal, such as monthly sales, collections, gross margin or days sales outstanding. A few well-chosen KPIs show you where to act before problems reach the accounts.
Why it matters to your business
Without KPIs, most owners run the business from the bank balance and the loudest problem of the day. A short, fixed set of numbers, looked at on a fixed day, shows trends early: margins slipping, dues growing, stock piling up. It also makes delegation possible, because each manager knows the number they are answerable for.
How it works
Good KPIs are specific, come from your books rather than guesses, and have a target. A distributor might review this each month:
| KPI | This month | Target |
|---|---|---|
| Sales before GST | ₹42,00,000 | ₹40,00,000 |
| Gross margin | 14.5% | 15% |
| Collections | ₹38,50,000 | Equal to last month’s sales |
| DSO | 41 days | 35 days |
| Receivables over 60 days | ₹3,20,000 | Under ₹2,00,000 |
| Stock days | 48 days | 45 days |
Sales are on target, but margin, DSO and old dues are not: the business is selling well and collecting slowly. The action for next month is collections, not more sales.
Common mistakes
- Too many numbers. A dashboard of thirty figures gets glanced at, not acted on.
- Only lagging indicators. Profit tells you what already happened. Add leading ones, such as open opportunities or overdue dues, that warn you in time.
- No owner. A KPI nobody is responsible for does not improve.
- Figures that do not match the books. If the KPI report and the accounts disagree, people stop trusting both. Take KPIs from the same data as your accounts.
- Targets without a baseline. Set targets after you have a few months of actual figures, and compare each month with the same month last year so seasonal swings do not mislead you.
Questions about KPI
What is the difference between a KPI and a metric?
Every KPI is a metric, but not every metric is a KPI. A KPI is one of the few numbers tied directly to a goal you care about, reviewed on a fixed schedule, with someone responsible for it.
How many KPIs should a small business track?
Few enough to review in a few minutes, typically five to eight for the owner, and two or three for each person responsible for an area such as sales, collections or stock.
Which KPIs matter most for a trading business?
Sales and gross margin, collections and DSO, overdue receivables, stock value and stock days, and cash in hand and bank. Together they show whether you are selling profitably and turning sales into cash.
How often should KPIs be reviewed?
Cash and collections daily or weekly, sales and margins monthly, and ratios such as DSO and stock turnover monthly against the same month last year.
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