Key performance indicators: What they are and how to use them

Published Tuesday 20 January 2026

Table of contents

• What is a key performance indicator?
• Why KPIs matter for your business
• Types of KPIs you should know about
• What does a KPI look like?
• How to implement KPIs in your business
• Understand what your metrics are telling you
• Track your KPIs with the right tools
• FAQs on key performance indicators

Key takeaways

• Focus on selecting 5-10 core KPIs that directly align with your specific business objectives rather than tracking numerous metrics, ensuring each measurement provides actionable insights for decision-making.
• Implement KPIs by first defining clear business objectives, then selecting relevant metrics, setting specific targets, and establishing regular review schedules to monitor progress and make timely strategic adjustments.
• Organise your KPIs into four key groups (efficiency, growth, health, and resilience) to create a balanced view of your business performance across operational processes, revenue growth, financial stability, and risk management.
• Interpret KPI data within proper context by considering seasonal variations, strategic business decisions, and external market factors rather than taking numbers at face value to avoid poor decision-making.

What is a key performance indicator?

A key performance indicator (KPI) is a measurable value that shows how well your business is performing against its key objectives. KPIs turn complex data into clear insights, helping you track progress and make smarter decisions.

Think of them like the instruments in a car's dashboard. The speedometer, fuel gauge, and engine temperature are all KPIs that tell you about the car's health and performance. In business, KPIs might measure sales growth, customer satisfaction, or website traffic to give you a clear picture of your success.

Why KPIs matter for your business

KPIs are more than just numbers; they are essential tools for strategic planning and growth. By tracking the right KPIs, you can get a clear, data-driven view of what's working in your business and what isn't.

This helps you:

• make informed decisions based on performance data, not guesswork
• keep your team aligned and focused on the same important goals
• spot potential problems early before they become major issues
• identify opportunities for growth and improvement

Ultimately, KPIs give you the confidence to steer your business in the right direction and achieve your long-term goals.

Types of KPIs you should know about

KPIs can be categorised in several ways, helping you measure different aspects of your business performance. Understanding these types helps you choose the most effective metrics for your goals.

• Strategic KPIs: These track progress towards big-picture business goals. They give a high-level view of performance, often over a longer period, like a year or a quarter. An example is market share or annual revenue growth.
• Operational KPIs: These measure performance over a shorter timeframe and focus on day-to-day business processes. Examples include weekly sales, daily website traffic, or monthly transport costs.
• Leading KPIs: These are forward-looking metrics that can predict future outcomes. They help you see if you are on track to meet your strategic goals. For example, the number of new sales leads this month could be a leading indicator of next month's revenue.
• Lagging KPIs: These measure past performance and confirm long-term trends. While they don't predict the future, they show the results of your past actions. Net profit and customer retention rate are common lagging KPIs.

KPI examples for small businesses

The right KPIs depend on your industry and business goals, which is why the Australian Taxation Office provides performance benchmarks that apply to 100 industries, helping businesses compare their performance against industry averages. Here are some common examples that are useful for many small businesses.

• Gross profit margin: Shows the percentage of revenue left after subtracting the cost of goods sold. It helps you understand the profitability of your products or services.
• Net profit margin: Measures the percentage of revenue that becomes profit after all expenses, including taxes and interest, are paid.
• Customer acquisition cost (CAC): The total cost of sales and marketing to acquire a new customer. It helps you assess the efficiency of your marketing spend.
• Customer lifetime value (CLV): The total revenue you can expect from a single customer account. Comparing CLV to CAC shows if your customer relationships are profitable.
• Debtor days: The average number of days it takes for your customers to pay their invoices. A lower number means better cash flow.

Choose what you measure with care

Choosing the right KPIs is crucial because different businesses need different measurements to track success effectively.

Focus on KPIs that provide:

• early success indicators that confirm when strategies are working
• problem alerts that warn you before issues become serious
• industry relevance so they match your specific business type and goals

Your accountant can help identify the most relevant KPIs for your business by evaluating several key factors:

• Industry type: Different sectors require different performance measures
• Business size and location: Local market conditions affect which metrics matter most
• Business lifecycle stage: Startups track different KPIs than established businesses
• Short and long-term goals: Align measurements with your specific objectives
• Unique circumstances: Personal factors that influence your business priorities

What does a KPI look like?

KPIs can take many forms, but effective ones share four key characteristics. Effective KPIs share four essential characteristics:

• Relevant: They focus on metrics that directly impact your business success
• Balanced: They include both short-term and long-term performance indicators
• Understandable: Everyone in your business knows what each KPI measures
• Shared: Your team understands why each KPI matters to overall success

Financial KPIs come from the data in your accounting system. Many of these measures follow standards set by the Australian Accounting Standards Board (AASB), such as new subtotals like operating profit that you must show in financial statements. This guide focuses on financial KPIs.

Non-financial KPIs come from data outside your accounting system, such as your website and your customer relationship management (CRM) system.

Here are examples of what you might measure:

• Debtor days
• Average margins
• Inventory turnover
• Debt ratio
• Net profit percentage

How to implement KPIs in your business

Setting up KPIs is a straightforward process that can transform how you manage your business. Follow these steps to get started.

1. Define your business objectives: What do you want to achieve? Your goals could be increasing revenue, improving customer satisfaction, or reducing costs. Clear objectives are the foundation for relevant KPIs.
2. Select KPIs that align with your goals: Choose a few key metrics that directly measure progress towards your objectives. Don't track too many; focus on what matters most.
3. Set clear targets for each KPI: A target makes a KPI actionable. For example, instead of just tracking 'website traffic', set a target to 'increase website traffic by 10% per quarter'.
4. Track and review your KPIs regularly: Consistently monitor your KPIs, whether daily, weekly, or monthly. Regular reviews help you understand performance and make timely adjustments to your strategy.

Four KPI groups to improve your business

Effective key performance indicators can be organised into groups. Here are four groups that could have a big impact on your business.

Efficiency

Focus on KPIs that help you:

• reduce waste and make the most of your resources
• improve staff productivity
• lower inventory days on hand to reduce storage costs

Growth

Focus on KPIs that help you:

• increase your sales, measured by gross and net revenue
• improve wealth, measured by business equity

Health

Focus on KPIs that help you:

• balance debt and equity levels
• balance inventory levels with trade payables
• optimise trade terms to speed up receipts

Resilience

Focus on KPIs that help you:

• reduce credit risk by optimising debt levels
• improve profitability to increase interest coverage
• reduce financial risk by increasing equity-to-asset levels
• Increasing your sales, measured by gross and net revenue
• Improving wealth, measured by business equity

These are just examples. You can add other KPIs that fit your business goals.

Modern accounting software makes KPI tracking simple and accessible. It also helps you prepare for new rules, such as Australian Accounting Standards Board (AASB) standard AASB 18, which applies from 1 January 2027.

Cloud-based solutions let you monitor your business performance from anywhere, ensuring you never miss important trends or opportunities. This real-time visibility helps you make faster, more informed decisions that drive business growth.

Understand what your metrics are telling you

Interpret KPIs within proper context rather than taking numbers at face value. Understanding the story behind your metrics prevents poor decision-making.

Common interpretation scenarios:

• Seasonal variations: Winter clothing sales naturally drop in summer. This reflects market patterns, not performance issues.
• Strategic purchases: Inventory turnover may temporarily drop after bulk buying during supplier sales. Monitor this measure to check it returns to normal levels.
• External factors: Market conditions, holidays or industry events can influence your numbers.

Understand what KPIs are telling you before you act on them. Used well, key performance indicators are powerful tools. Your accountant can help interpret the story behind the numbers.

Track your KPIs with the right tools

Tracking KPIs does not have to be a manual process. The right tools automate data collection and give you real-time insights into your business performance. Cloud accounting software like Xero lets you monitor your financial KPIs in one place so you can run your business, not your books.

With customisable dashboards and reports, you can see a clear view of where your business is now and where it's heading. This helps you take the pulse of your organisation's health and make confident decisions to drive growth. Ready to run your business, not your books? Try Xero for free.

FAQs on key performance indicators

Here are answers to some common questions about key performance indicators.

What are five examples of key performance indicators?

Five common examples of KPIs for small businesses are net profit margin, gross profit margin, customer acquisition cost (CAC), customer lifetime value (CLV), and debtor days. The best KPIs for your business will depend on your specific industry and goals.

What is the difference between a KPI and a metric?

A metric is any quantifiable measure used to track business activity. A KPI is a specific type of metric that is tied directly to a key business objective. In other words, all KPIs are metrics, but not all metrics are KPIs. KPIs are the metrics that matter most to your success.

How many KPIs should a business have?

Rather than tracking too many KPIs, focus on a small set of high-value measures. A small business might track between five and ten core KPIs. The goal is to have enough data to make informed decisions without creating unnecessary complexity or confusion.