KPIs and metrics: how to choose the figures you steer by

A key performance indicator (KPI) shows whether you are reaching a strategic goal. A metric tracks how a process runs and gives context, with no target or decision attached. Steer by a handful of KPIs, each with a fixed formula and an owner, and keep the rest as metrics. Your monthly report gets shorter, and the management team knows what each figure asks it to decide.

What is the difference between a KPI and a metric?

A KPI belongs to a strategic goal, a metric to a process. Take accounts payable. Invoices per full-time employee (FTE) show how the process runs, so that figure is a metric. If you steer on your cash position, days payable outstanding (DPO) is the KPI.

How do you choose the KPIs you steer by?

Start with your strategic goals and choose a few KPIs for each one. Our advice is no more than ten in total.

Combine lagging and leading indicators. A lagging indicator, such as gross margin after the month-end close, measures the result of earlier decisions. A leading indicator, such as order intake, predicts a result and gives you time to change course.

For each KPI, write down:

• The goal it belongs to
• The formula and its source in your system
• The owner, who watches the figures and acts when they deviate
• How often you measure and which target applies
• Which action follows when the value crosses a limit

People decide: the management team sets the goals and the targets. Our 2024 KPI whitepaper, in Dutch, is a general guide rather than an IFS Cloud one, with five questions for testing each KPI. Read its liquidity norms as rules of thumb, as explained below. Download the KPI whitepaper.

Which five financial KPIs show how your business is really doing?

Gross margin, operating margin, days payable outstanding (DPO), current ratio and quick ratio. Together they show your margin, your payment behaviour and your liquidity. Below are the standard formulas of the Corporate Finance Institute (CFI).

• Gross margin = (revenue − cost of goods sold) / revenue. Compare it only with companies in your own sector.
• Operating margin = operating income / revenue. Operating income is the profit from your core operations, before interest and taxes. If this margin falls while gross margin holds steady, your indirect costs are taking a larger share of revenue.
• Days payable outstanding (DPO) = average accounts payable / cost of goods sold × number of days in the period. DPO is the average number of days you take to pay suppliers.
• Current ratio = current assets / current liabilities. Above 1, your current assets cover the debts that fall due within a year. A very high ratio can mean cash is sitting idle.
• Quick ratio = (current assets − inventory − prepaid expenses) / current liabilities. Above 1, you have enough liquid assets to cover your short-term liabilities.

Even standard formulas leave choices open. If sales counts different costs in cost of goods sold than finance does, your business has two gross margins, each correct by its own definition. For DPO, you choose how to take the average payables balance and which period to use. Record those choices with the formula and source of each KPI.

A “healthy” current ratio of 1.5 to 2 is a rule of thumb. CFI sets no upper limit, because it depends on the industry. Compare your ratios with your own trend and your sector.

A high DPO helps your cash position, but unhappy suppliers may then offer worse terms. The law sets limits too. Under article 6:119a of the Dutch Civil Code, an agreed payment term is in principle no longer than 60 days.

A large company paying a small or mid-sized supplier or a sole trader has a 30-day maximum, and a longer term is void. Since 1 February 2022, Belgium has capped payment terms between businesses at 60 calendar days, unless a royal decree allows more for a sector. A DPO target above the terms you may legally agree with your suppliers in effect relies on paying late.

When does your KPI framework need a review?

At least once a year, as a fixed part of your planning cycle, and sooner if your strategy or market changes. A framework set up years ago can keep working on paper while teams chase goals that no longer fit your direction.

Take a manufacturer that steers by production volume while demand shifts towards variety and customisation. If it holds on to volume, it risks missing problems with quality or customer satisfaction.

You can test this on your own monthly report. Next to each KPI, note which decision the management team took on it last quarter, and which goal in your current strategy it belongs to. If either stays blank, the figure is a metric, or it can leave the report.

Which pitfalls make KPIs worthless?

Three pitfalls turn a KPI into a number nobody steers by.

• Vanity metrics. A customer satisfaction score with no link to customer churn impresses in a presentation but says little about how you perform.
• The wrong growth phase. KPIs that suited an earlier phase of your business miss the signals of the phase you are in now. Read how the Greiner model describes the growth phases.
• Unreliable data. If your team doubts the figures, it decides on gut feeling. So make the owner of each KPI responsible for the quality of its source data too.

How do you turn a measurement into an improvement?

By taking your figures from one source, so the meeting discusses the action and not which number is right. If sales and finance each work in their own system, they end up with different numbers. Then automate data collection, so your controller has time for analysis. Read how to run financial reporting from one system.

Our KPI whitepaper describes a manufacturer with long lead times in accounts payable, error-prone manual work and late payments to suppliers. Centralising alone did not fix it. This customer did not run IFS Cloud. Eqeep automated invoice approval, notifications and payment scheduling in the customer’s own ERP system.

The combination of centralisation and automation shortened lead times, raised the number of invoices per FTE and cut the error rate. Payment terms with suppliers were also renegotiated. If you run IFS Cloud, there is a separate route for supplier invoices. See how the TRAILD add-on processes supplier invoices in IFS Cloud.

How do KPIs show up in IFS Cloud?

In a lobby, a page that brings data from IFS Cloud and external sources onto one screen. A lobby is built from elements such as counters, charts, lists, gauges and Power BI reports. Many elements let users click through to a page the administrator has set up.

For a KPI with a target, use a state gauge. It shows the value as a traffic light between a lower and an upper limit. Those limits are fixed values or come from columns in the data source. Keep the target in one place, so the lobby and the monthly report use the same norm.

For the KPIs in IFS’s industry lobbies, IFS Cloud has its own KPI definition. Each KPI takes its value from manual entry, a workflow or Power BI. A workflow KPI is calculated on the schedule you set and stores each result as a new record.

A KPI does not calculate itself, then. Someone has to build the workflow or enter the value. Which elements and KPI features you see depends on your release, licence and permissions. See the IFS Cloud features hiding in plain sight.

You do not need IFS Cloud to choose your KPIs. Five good definitions in a spreadsheet are a better start than a lobby with thirty counters.

Questions about KPIs and metrics

How many KPIs should you track?

No more than ten in total is our advice, with a few for each strategic goal. Keep the other figures as metrics. Too many measures cloud the view of your most important goals.

What is a good current ratio?

A ratio above 1 means your current assets cover your short-term liabilities. There is no fixed upper limit, because it depends on your sector. A very high ratio can mean cash is sitting idle that you could invest.

Why does the quick ratio leave out inventory?

Because, according to CFI, it may take too long to turn inventory into cash. Prepaid expenses are left out too. If you hold a lot of inventory, your current ratio can sit above 1 while your quick ratio falls below it. You can then pay your short-term liabilities only after you have sold stock.

Tell us where you stand with IFS. After one conversation you will have a clear next step. Bring your current KPI list. Discuss your IFS question.