How to create operational KPIs

6 Questions finance teams should ask themselves in building operational KPIs
Jamie-Lee Salazar
Co-founder & CEO of Cobbler
Organizations are shifting from financial planning and analysis (FP&A) to extended planning and analysis (XP&A) as agility plays an increasingly big role in business operations. As a result, organizations must develop and track more efficient key performance indicators (KPIs).

This creates a big opportunity for finance teams to become more involved in developing their organizations' strategies. Unfortunately, many teams don't know how to establish better and more efficient KPIs based on XP&A standards. This article aims to change this by reviewing six insightful questions that financial teams should ask themselves when developing operational KPIs.

    1. What impacts the business?

    Knowing which factors impact the business's performance and growth is an excellent start when developing operational KPIs. Common factors that affect a business's performance include:

    • Revenue generation and profit percentages
    • Sales and gross margin growth
    • Customer lifetime value
    • Employee productivity and retention rate

    These are often the financial drivers that you're already starting to include in your model. Besides identifying these and other factors, it is also important to rank them based on their impact on the business's performance. This will help you identify high-level metrics that can help you measure and drive business growth.

    2. What are you trying to achieve?

    The next questions should address what the business is trying to achieve – the business's goals and objectives. Ideally, every department creates KPIs that support these high-level business objectives. In addition, departmental managers come up with the activities and expected results that will contribute to the larger business goals.

    3. How can you measure and track KPIs?

    Measurability is one of the main principles of KPIs, meaning that the indicators should be quantifiable and easy to track. Tracking and measuring KPIs is essential to determining efficiency and identifying strengths and shortcomings.

    Setting long-term and short-term targets for your KPIs can help make them easier to track and measure. On the one hand, short-term targets can help you measure the progress on different KPIs to see whether or not you are still on track to achieving the bigger goals. On the other hand, long-term targets can help you maintain focus on (and thus achieve) the business's broader goals.

    4. How will you achieve the set goals?

    Setting goals and objectives for a business and its KPIs is only one half of the equation – the other half entails achieving them. This necessitates developing plans and strategies for the activities you are going to do to help you achieve the set goals. Asking yourself this question will help you develop and define the plans, strategies, and underlying operational activities the business should undertake to achieve its goals and objectives.

    5. What investments do you need to achieve the business's goals?

    It's easy to list many activities and say that you're going to act on them, but many of these activities ultimately require some financial investment. So make sure you're allocating the right amount of budget to do the business's activities to hit its goals. Of course, allocating too little money will set the team up for failure, but allocating too much creates an opportunity cost because you're ultimately taking money away from other things the business could have funded.

    Most businesses have limited funds and other resources that they can use to advance their plans and achieve their goals. Determining where to allocate these resources and the amount of money to invest in each activity can help improve the business's performance in fields that matter the most, thus enabling it to achieve its goals and objectives.

    6. How is it going?

    Are the business's activities and performance aligned with its goals and the underlying KPIs? Many companies stop after they have created the KPIs. Instead, they start executing the tactical activities and don't look at the performance until the quarter or year has ended. Unfortunately, if you're not on track, this can create a challenging public conversation during ops reviews when the team has missed its KPIs. As a result, regular check-ins can ensure that the team is executing the activities and can start measuring early success to see how the organization is doing.

    Equip your finance team with the right resources

    Businesses and finance teams can develop more efficient and reliable KPIs when using the right tools. This is where Cobbler comes into the picture – we provide businesses with the proper tools and resources to automate and ease their financial activities. Get in touch today or book a demo to learn more about our solutions.