AP Business with Personal Finance · Lesson 1

Managing, leading and measuring with KPIs

Know Know it

Managers do four kinds of work. Planning sets goals and decides how to reach them. Organizing arranges people, tasks and resources. Leading guides and motivates people. Controlling measures results against the goals and corrects gaps. Controlling feeds back into planning, so the four functions form a loop.

Leadership styles differ in how much the team shares in decisions. An autocratic leader decides alone and gives orders: fast, and useful in an emergency or with a new, inexperienced team, but it can lower morale over time. A democratic leader involves the team: slower, but it builds buy-in and uses the team's knowledge. A laissez-faire leader sets broad goals and steps back: it suits skilled, self-motivated experts and can drift with a team that needs direction. No style is best everywhere; a good leader matches the style to the situation and the people.

A key performance indicator (KPI) is a number tracked over time to show whether the business is reaching a specific goal. A good KPI matches the goal, can be measured the same way each period, and is judged against a benchmark: a target, the business's own past results or similar businesses.

Common KPIs: conversion rate = purchases / visitors (or chances to buy); customer retention rate = customers kept / customers at the start of the period; employee turnover rate = employees who left / average number of employees; average order value = revenue / number of orders. Financial ratios from the statements, such as the net profit margin, are KPIs too.

KPIs work best for SMART goals: specific, measurable, achievable, relevant and time-bound. "Improve service" cannot be checked; "cut average delivery time to under 30 minutes by June 30" can.

Trap A rising count is not always progress

Raw counts can grow while performance falls. More orders may come only because more people visited, while the share who buy dropped. Before you call a KPI an improvement, check whether it is a rate or a count, and compare it with its benchmark.

Worked example Easy

The manager of a fictional bike shop decides that two mechanics will handle repairs, one worker will run the front counter, and all three will report to the shop's lead mechanic. Which management function is this?

  1. Planning
  2. OrganizingAnswer
  3. Leading
  4. Controlling

How to solve it

  1. Find the main action: the manager assigns jobs and sets who reports to whom.
  2. Arranging people, tasks and reporting lines is the organizing function.
  3. Planning would set the goal, and controlling would check the results later.

Why each choice is right or wrong

  • A. Incorrect. Planning sets goals and the steps to reach them; this manager is assigning jobs and reporting lines, not setting a goal.
  • B. Correct. Deciding who does which job and who reports to whom is organizing.
  • C. Incorrect. Leading is about motivating and guiding people, not deciding which person handles which task.
  • D. Incorrect. Controlling measures results against goals and corrects gaps; nothing is being measured here.

Explain Explain it

Task verbs: calculate, justify

To calculate a KPI, write the formula, put in the numbers and give the answer as a percent or a rate. To justify a KPI choice, connect it to the goal: say what the KPI measures and why a change in it would show progress toward that goal. A KPI that measures something else, even something good, does not show progress toward this goal.

Worked example Medium

Website results, Lumen Lamp Co. (fictional)

MonthVisitorsOrders
April8,000240
May10,000250
June12,500250

What happened to Lumen's conversion rate from April to June?

  1. It rose from 2 percent to 3 percent
  2. It stayed the same at 2.5 percent
  3. It fell from 3 percent to 2 percentAnswer
  4. It fell from 3 percent to 2.5 percent

How to solve it

  1. Conversion rate = orders / visitors.
  2. April: 240 / 8,000 = 0.03, or 3 percent.
  3. June: 250 / 12,500 = 0.02, or 2 percent, so the rate fell even though orders rose.

Why each choice is right or wrong

  • A. Incorrect. Rising from 2 to 3 percent reverses the months; April's rate is 3 percent and June's is 2 percent.
  • B. Incorrect. 2.5 percent is May's rate (250 / 10,000); the rate was not the same in all three months.
  • C. Correct. April: 240 / 8,000 = 3 percent. June: 250 / 12,500 = 2 percent. Visitors grew faster than orders.
  • D. Incorrect. Ending at 2.5 percent stops at May; by June the rate had fallen further, to 250 / 12,500 = 2 percent.

Justify Your turn

A fictional dog-walking company sets the goal of keeping more of its customers from one year to the next. Name one KPI the company could track to measure progress toward this goal, and justify your choice by saying what a change in that KPI would show.

Write it, then compare. Nothing you type here is saved or graded.

Compare with a model answer

A full answer does this

  • Names a KPI that measures keeping customers, such as the customer retention rate, the renewal rate or the share of customers who cancel
  • Justifies the KPI by saying which direction of change would show progress toward keeping more customers

Model answer

The company could track its customer retention rate: the share of last year's customers who are still customers this year. This KPI fits the goal because it measures keeping customers directly. If the rate rises from one year to the next, the company is keeping a larger share of its customers, so it is making progress toward the goal.

Apply Apply it

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