Meaning and definition of performance indicator
A performance indicator refers to an industry jargon term for a type of performance measure. The performance indicators are, generally, used by an organization for evaluating its achievements or the achievements of a specific activity it is engaged in. Many a times, success is defined in terms of progressing towards strategic goals, but very often, success is simply referred as the repeated achievement of some level of operational goals.
Categories of performance indicators
The performance indicators delineate a set of values used to weigh against. These raw set of values, which are provided for systems in charge of summarizing the info, are defined as indicators. The indicators recognized as probable candidates for performance indicators can be categorized into the following categories:
- Quantitative indicators that can be presented as a numeral (return on assets, return on equity, revenue per employee, etc).
- Practical indicators which line with existing company processes.
- Directional indicators which specify whether an organization is getting better or not.
- Actionable indicators which exist sufficiently in an organization’s control to effect change.
- Financial indicators are used in measuring performance and while looking at an operating index.
Important aspects of performance indicators
Performance indicators are methods employed for assessing the performances of business units, organizations, and their departments, division, and employees. Consequently, performance indicators are most commonly described in a way which is understandable, measurable, and meaningful. Moreover, they are seldom defined in a way such as their fulfillment is hampered by factors seeming to be non-controllable by the businesses or individuals responsible.
Recognizing the performance indicators of organization
The performance indicators are different from business drivers and goals (or aims). For example, a school might think about the failure rate of its students as a performance indicator which might prove to be helpful to the school in understanding its position in the educational community, while a business might think about the percentage of income from repeated customers as a potential performance indicator.
The main stages in identifying performance indicators include:
- Having a pre-defined business process
- Having requirements for the business processes
- Having a quantitative/qualitative measurement of the results and comparing them with pre-defined goals
- Finding variances and tweaking resources or processes to achieve short term goals
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software