What Does Key Performance Indicators (KPI) Mean?
Key performance indicators (KPI) are the specific metrics used by a management team to determine if the company is performing. When these indicators are properly lined up with the company's strategic objectives, and they trend favorably, positive financial results usually follow.
Companies must be very careful in choosing the right key performance indicators as the wrong ones can drive the wrong behaviors. For example, if the company's strategic objective is to be more profitable rather than grow the revenue line, the KPIs should focus on productivity or profitability at the lowest common denominator (like per product, per employee or per piece of equipment), rather than metrics that encourage revenue line growth.
Divestopedia Explains Key Performance Indicators (KPI)
During the integration phase, buyers usually develop a 90-day plan to guide the acquired company through the various initiatives that will generate significant value. Often, this 90-day plan includes the development of specific key performance indicators to deliver high levels of free cash flow and return on invested capital.
Operational KPIs drive this process, but, similarly, some financial KPIs, such as days sales outstanding (DSO) and inventory turnover, are usually developed to manage the balance sheet. Once the KPIs are developed, they are built into the information systems so they can be reviewed regularly (say, weekly) in a simple report often referred to as a dashboard.
When a company is in a sales process, buyers expect the target's management team to know their KPIs. Management must understand what drives the performance of the business. While not a dealbreaker, buyers may consider the lack of KPI knowledge an issue with management, which could lead to a valuation discount.