How do you know if your business is successful? Do you use metrics? Or do you use key performance indicators? What is the difference between them?
A metric is a measurement you use to track and assess the condition of a process. These measures give you information about how the process is working and provide a baseline for improvements. KPI stands for a key performance indicator. It measures how well the business is doing against a goal. Key performance indicators are strategic, and metrics are tactical.
Let’s use the Yummy Broths restaurant that specializes in soups as an example. One process for Yummy is cooking a plate of chicken soup. To measure the status or condition of this plate, the owner can use the cost per plate, sales per day, or the quantity of the ingredients per batch. One goal for Yummy Broths is to increase the gross margin by 20% before the end of December 2020. The owner decided to track the cost of goods sold (COGS) as the KPI.
KPIs are metrics, but as the name indicates they are key metrics. Not everything is key, otherwise, nothing is. KPIs are like vital signs for the business. Metrics are tactical because they measure the daily business activities that support the accomplishment of the goals. The KPI will let you know If something is wrong, other metrics will help explain why.
The restaurant owner decided to increase profit by reducing the cost of goods sold rather than increasing revenues. The standard is 31% of the sales or less. When the COGS reaches 40%, Yummy Broths owner knows that something is wrong. He knows that for his business profitability, inventory cost is vital. One way to control it is by making sure cooks use the right amount of ingredients to prepare each recipe. Looking at the ingredients used, he realized that compared to the standard, the ingredients per batch are off. Cooks are using more quantity than the recipe asks for. Now he can take action to correct the performance against the goal. Meeting the ingredients per batch standard will support achieving the COGS.
There are two critical things about KPIs, selection, and follow-up. Select indicators that aligned with the business objectives. Always look for the best way to measure the progress towards the goal. Also, since they are critical, monitor them weekly. Do not wait until the month-end because it will be too late to do something if you need it.
Now that you know the difference between metrics and KPIs, go check if you selected the right metrics to measure your business goals.