Exceptional service, a standout product, and even a strong competitive advantage are all powerful foundations for success. But no matter how compelling, they can only take a business so far. Even a leader’s intuition alone isn’t enough to sustain growth.
Instead, long-term success comes from measuring your performance, making data-driven decisions, and continuous improvement, which all starts with the right key performance indicators (KPIs).
These KPIs serve as “vital signs” of your organization’s health, allowing you to move from reactive reporting to proactive decision-making. The problem is that many companies spend a dangerous amount of time and money using KPIs incorrectly — from trying to measure everything, using vague metrics, or simply things that aren’t at all tied to your business strategy.
So, what are your KPIs? Are you confident they’re the right metrics for your organization? Not even sure where to start?
What KPIs really are (and why they matter)
More than figures on a dashboard, KPIs are measurable signals that show whether your business is moving in the right direction, aligned with its strategy, and capable of sustaining long‑term performance. For leaders, KPIs clarify priorities and reduce ambiguity, all while helping teams understand what “good” looks like. They also create focus by directing attention and resources toward the activities that truly influence results. When KPIs are smartly chosen, they build accountability across the organization.
But the real power of KPIs lies in their ability to drive improvement. By consistently monitoring performance, businesses can spot trends, identify inefficiencies, and make informed decisions before issues escalate. Unfortunately, this is where many organizations fall short, by relying solely on trailing KPIs, also known as lagging KPIs (like the monthly P&L and other backward‑looking financials), as Michael Stier with EOS shares:
“Unfortunately, these trailing KPIs are often the only metrics business owners receive on a regular basis ... often with so much detail that the noise overwhelms the signal. As a result, owners and their leadership teams are often left frustrated by the lack of concise and insightful information.”
Without forward‑looking indicators – known as leading KPIs – companies miss opportunities to anticipate challenges and adjust strategy. Examples of a leading KPI could be new sales inquiries, social media engagement, planned vs. actual hours, cycle time, etc. These can all help you better understand your company’s current health and the progress you’re making.
What should be measured
Every organization has different priorities, such as more customers, stronger cash flow, or maybe tighter operational efficiency. The important step is anchoring your metrics to the activities and outcomes that matter most. Keep these steps in mind as you start down the KPI decision process:
Start with the business objective – Clarify what success looks like: revenue growth, improved margins, better customer retention, stronger working capital? These high‑level objectives form the foundation for meaningful KPIs. A good rule of thumb? If a metric doesn’t link to a goal, it’s not a KPI.
Identify the critical success factors – Map the processes that influence the goals you just identified, like sales outreach, production throughput, service delivery, marketing engagement, etc. KPIs should reflect the performance of these essential drivers. Determine what must go right to achieve each objective.
Define the KPI – A good KPI will follow the SMART framework, the famous system first introduced in 1981 by George Doran as a way to define and achieve clearer goals. As you’re sifting through all the potential metrics, filter them through the five SMART criteria:
- Specific: Clearly defined and free of jargon.
- Measurable: Quantifiable with available or attainable data.
- Achievable: Realistic given your resources and market conditions.
- Relevant: Directly tied to your strategic goals.
- Time‑bound: Evaluated within a defined timeframe.
This structure transforms vague intentions into actionable targets. For example, instead of “improve sales,” a SMART KPI would be “Increase sales revenue by 15% in Q3 2026.” This process also allows you to focus your KPIs to a set of five to seven metrics that clearly reflect business health and guide decision‑making.
Set targets and assign ownership – Define what success looks like: What’s the desired performance? Every KPI should have a clear owner, so empower your team to act on insights and hold them accountable for driving improvement.
Ensure data quality – A KPI is only valuable if you can influence it and actually trust the data behind it. Prioritize metrics supported by accurate, accessible, and timely information.
Monitor, review, act – KPIs only matter if they drive action, so they should be reviewed regularly in leadership or team meetings. Investigate the trends, not just point-in-time results. As strategy evolves, KPIs should, too.
Essential financial metrics every business should track
While every organization’s KPI mix will look a little different, we often recommend a handful of foundational financial metrics that offer a clear view of operational health, cash strength, and long‑term sustainability.
Cash conversion cycle (CCC)
This key metric measures how many days it takes to turn investments in inventory and receivables into cash. A shorter CCC means the business is moving from cash out to cash in more quickly, while a longer CCC may signal issues with inventory turnover, production bottlenecks, or slow collections. This is a great one if you’re looking to strengthen liquidity or reduce your reliance on external financing.
Bank covenants
Loan agreements often include financial covenants that borrowers must meet to maintain compliance. These metrics protect lenders by ensuring the business remains healthy enough to repay its debt, but they also protect the business by providing early warning signs of financial stress. Common covenant‑related metrics include minimum liquidity thresholds, maximum leverage ratios, and minimum debt‑service coverage ratios.
Operational efficiency ratios
These reveal how effectively a company uses its assets and manages expenses to generate revenue. They also help leaders understand whether operations are running lean or if resources are being underutilized. Two common ratios include:
Efficiency ratio (operating expenses/revenue) – Shows how much of each revenue dollar is consumed by operating costs.
Asset turnover ratio (revenue/assets) – Measures how effectively the company uses its asset base to generate revenue.
Together, these ratios provide a balanced view of cost management and resource productivity, and they’re valuable if your business is focused on scaling, optimizing margins, or improving return on investment.
Stronger metrics lead to stronger outcomes
More than just set-it-and-forget-it dashboards, KPIs are strategic tools that create a forward‑looking view of the business, enabling teams to respond quickly, allocate resources effectively, and pursue growth with intention.
As markets shift and priorities evolve, KPIs must evolve with them. That’s where disciplined FP&A support becomes invaluable. With a structured approach to selecting, tracking, and interpreting KPIs, organizations can move beyond reactive reporting and build a performance culture rooted in insight and accountability.
If you’re ready to strengthen your financial visibility and long‑term planning, the MarksNelson team provides the expertise to identify meaningful metrics so you can turn data into action.
