Board Governance: How do we set key performance indicators?

Organizations invest significant time and effort in setting its vision and mission, and preparing a strategic plan to achieve that mission. Key performance indicators (KPIs) are an excellent way to measure and monitor how the organization is performing. Here are some tips to establishing KPIs for your organization:

  • The measures chosen should relate to financial performance, core activities, elements of the strategic plan and may include external restrictions, such as debt covenants. Some examples include return on assets, number of clients, average donation amount, number of programs delivered or satisfaction levels on a customer survey.
  • KPIs should be tailored to your organization, rather than general in nature.
  • KPIs tend to be quantitative, and generally should include measures other than elements of the financial statements. These other measures usually represent the underlying activity drivers that influence the financial results.
  • KPIs should be prioritized so that the management team is focused on the most critical measures. If appropriate, limit the number of KPIs you monitor to increase focus on the most important items.
  • KPIs should relate to areas where action can be taken to influence results.
  • KPIs should be tracked over time to monitor trends and business cycles.
  • Benchmark your KPIs against published measures in your industry.

Reporting KPIs in an effective manner is key to allow board members and management to quickly see how the organization is performing. Typically, graphs and charts are easier to understand, especially when all the measures can be shown in a one page snapshot or dashboard. Some organizations use color coding, such a green, yellow and red, to highlight which areas are on target and which are not. For not for profit organizations, KPIs can also be an effective way to externally report back to donors and other stakeholders regarding the outcomes of activities.

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