What is a COO KPI?
An operational key performance indicator (KPI) or metric is a measure that a company uses to evaluate its performance. By monitoring operational metrics, a company is able to identify growth opportunities and build on its strengths.
A chief operating officer (COO) is second in command to the chief executive officer (CEO), and is responsible for the company’s internal affairs. COO KPIs are metrics that the COO uses to gauge the performance of all departments within the company. Analyzing and interpreting these data will allow the COO to accurately measure the effectiveness of procedures and direct the company to a more productive path.
Breaking Down the COO Role
Traditionally, a COO has been anything from an experienced person who brings the vision of the CEO to life, to a partner whose skills complement that of the CEO’s. Even though the management style and background of each COO might be different, the core responsibilities of the job remain the same. The COO oversees all operations within the company and has a thorough understanding of every cog in the machine: administration, human resources, manufacturing, technology, etc. In order for the COO to effectively lead this diverse team, they must be able to design and monitor metrics that accurately portray the performance of each department.
These large operational datasets are often tracked through an ERP system. insightsoftware offers a variety of solutions for automated and flexible reporting that are compatible with almost any ERP software available on the market and could be used to create custom KPI dashboards.
This post highlights the top financial, production, and personnel metrics that will help the COO lead an effective team.
Top Financial COO KPIs
One of the primary responsibilities of a COO is to work with the CEO and CFO to ensure that the company financial KPIs are performing well. We believe that these are the top eight financial COO KPI examples:
- Current accounts receivable: This COO metric shows the amount of money that is owed to the business by its debtors. This measure highlights the upcoming income and, in conjunction with accounts payable, allows the company to accurately plan for its cashflow (i.e., growth investments). A high current accounts receivable number might mean that the company is losing money and is unable to collect its debts.There is another KPI closely related to current accounts receivable and that is debtor days. This is the number of days that a company takes to collect its money. It is recommended to keep this number low.
- Current accounts payable: Is your COO aware of how much money the company owes to its creditors (suppliers, banks, etc.)? As mentioned previously, this COO KPI, alongside current accounts receivable, showcases the company’s cashflow.There is another KPI closely related to current accounts payable and that is creditor days. This is the number of days that a company takes to pay its creditors. Similar to debtor days, the COO should strive to keep this number low.
- Operating cash flow (OCF): The OCF metric is one of the most important COO metrics. It illustrates the total amount of cash that the company generates. A positive cash flow means that the company has the opportunity for growth, and a negative cash flow points to a need for external financial help. OCF is calculated by adjusting net income for changes in accounts receivable, accounts payable, depreciation, and changes in inventory.Operating cash flow KPI is calculated using this formula: EBIT + Depreciation – Taxes – Change in Working Capital
- Quick ratio (acid test): This is a quick test for the COO to determine the business’s short-term liquidity. This COO metric indicates the company’s ability to pay its current liabilities by only using its cash or near-cash assets (working capital), without selling its inventory or external financing. A high quick ratio points to a company with a better liquidity and financial health.The quick ratio KPI is calculated using this formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
- Gross profit margin: This metric shows the revenue exceeding the cost of the business. This KPI is expressed as a percentage. A high gross profit margin is desirable.Gross profit margin is calculated using this formula: (Total Revenue – Cost of Goods Sold) / Total Revenue.
- Net profit margin: The net profit margin COO metric shows how much of the company’s revenue translates to profit. Similar to gross profit margin, this KPI is also expressed as a percentage. A high net profit margin is an indicator of a COO’s ability to generate revenue.Net profit margin is calculated using this formula: (Total Revenue – Cost of Goods Sold – operating expenses – other expenses – interest – taxes) / Total RevenueBecause net profit margin takes into account a company’s total expenses, compared to gross profit margin, net profit margin is a much more definitive measure of a company’s success.
- Working capital (net working capital): COOs are often concerned with a company’s liquidity. This KPI allows the COO to assess the operational efficiency and the short-term financial health of the company.Working capital is calculated using this formula: Sum of all the Company’s Current Assets / Current Liabilities.The company’s current assets in this calculation include cash, accounts receivable, inventory, short-term investments, and marketable securities (assets that are easily converted to cash within a year or less). If the company’s currents assets do not exceed its current liabilities, it may be interpreted that the business cannot pay its creditors.
- Return on equity (ROE): This performance metric shows the profitability of the company in regard to its stakeholders’ equity.ROE is calculated using this formula: Net Income / Average Shareholders’ EquityThere is no hard and fast rule for an acceptable equity. It varies from industry to industry and depends on the company’s competitors. The COO should aim to keep the company’s ROE above and beyond the industry average.
Creating meaningful and accurate KPIs is time-consuming and cumbersome. Financial KPI software provides companies with the right tools to make the decisions that are right for their business.
Top Production COO KPIs
COOs spend a very large portion of their time reviewing production KPIs and looking for ways to increase manufacturing efficiency. Here is a curated list of COO KPIs that you should be tracking in your production dashboard:
- Throughput: This COO metric helps identify the weakest link in the production line. Throughput is the amount of produced goods or services in a specific period. A COO’s objective is to identify the hindering component or process in a supply chain and maximize its capacity. Throughput can be increased by reducing equipment downtime, improving maintenance strategies, reducing the number of production steps, and many more. This is what makes throughput an important KPI for optimizing a business.
- Total cycle time: The cycle time KPI is used to determine the efficiency of a company’s production line. The COO can use this KPI to monitor how long it takes to convert the raw materials into finished goods. With a short cycle time, a company can generate more revenue and quickly implement innovative solutions.
- First pass yield (FPY): This COO KPI shows the quality of a company’s production. This KPI is expressed as a percentage and is calculated using this formula:
Number of Produced units that Didn’t Require Any Rework / Total Number of Units Entering the Production Process.FPY is also known as the throughput yield (TPY). A low FPY indicates a flawed production process and informs the COO that process improvements are required.
- Planned maintenance percentage (PMP): This metric is used by COOs to measure the cost-effectiveness of a company’s maintenance strategy. PMP is calculated using this formula:
Number of Planned Maintenance Hours / Total Number of Maintenance Hours.Because planned maintenance costs significantly less than corrective or emergency maintenance, a higher PMP leads to major savings for the company. As a biproduct, a high PMP will also lead to better manpower planning, more efficient scheduling, and longer equipment runtimes. Most preventative maintenance advocates recommend a target PMP of 85 percent or higher.
- Reportable health and safety incidents: Safety standards are paramount for any company. This COO metric is used to measure the effectiveness of a company’s safety standards. At first glance, safety KPIs do not appear to belong in production KPIs. However, it should be noted that advocating for safety measures at the workplace makes the employees feel valued and appreciated, and a valued employee is much more productive. The reportable health and safety incidents KPI allows the COO to monitor and improve on working conditions and processes.
- Availability: This COO KPI shows the ability of a piece of equipment to be operated if needed. Availability is calculated using this formula: Uptime / (Uptime + Downtime).In this formula, downtime includes both planned and unplanned activities. The objective of a COO should be to reduce downtime and increase availability. It is advised that while tracking this measure, in order to better address the problems, the reasons behind downtime be noted.
It is important to remember that these COO production KPI examples are just the tip of the iceberg. If your COO really likes to drill down into the data, you will need a comprehensive reporting software solution that is capable of tracking and correlating tens of KPIs.
Top Personnel COO KPIs
One of the most important factors that can make or break a company is its workforce. Happy employees are more innovative, productive, and efficient. Below are some examples of most important personnel KPIs that the COO must track and monitor.
- Absenteeism rate: This metric shows the absences of employees during a work period. This KPI is expressed as a percentage. The absences included in this KPI are generally unplanned or unapproved time off and do not include pre-planned vacation time. Examples of such absences include illness, childcare problems, family emergencies, tardiness, etc.
A low absenteeism rate shows that the company is able to provide an engaging and healthy environment for its employees.
- High performer turnover rate: One of the most challenging parts of a COO’s job is figuring out how to retain top talent. This metric shows the contentment of a company’s top employees with their jobs. The high performers are employees that receive the highest performance reviews.This KPI is expressed as a percentage and is calculated using this formula: Highest Performers who Left the Company / Highest Performers Remaining.There are no hard and fast rules for an acceptable high performer turnover rate. The COO must ensure that the company meets and exceeds the industry average.
- Female-to-male and ethnic diversity ratios: These two metrics show the diversity of a company. A diverse workforce brings in a variety of perspectives and is able to quickly improve long-standing work processes. Studies have shown that a diverse workplace is more productive and innovative.The female-to-male ratio is calculated using this formula: Number of Female Workers / Number of Male Workers.Ethnic diversity ratio is calculated similarly, using this formula: Number of Minority Employees / Total Number of Employees. The modern COO should aim for 1:1 female to male and ethnic diversity ratios.
- Job referral percentage: This is a commonly used metric that gauges the strength of a company’s culture. Human Resources departments often measure employees’ job satisfaction with self-reported surveys. However, measuring the job referral percentage is the clearest indicator that the employees are content. An employee only refers their family or friend when they feel confident that the company’s environment is truly incomparable.Job referral percentage is calculated using this formula: Number of Roles Filled by Referrals / Number of Roles Filled.The COO should aim to keep this KPI high as it is also an economic method to hire low-risk talent.
- Training investment per employee: This COO metric shows the amount of money that a company is investing in training and development of its staff. If the business doesn’t invest enough, it is possible that the company struggles to develop its in-house talent and risks losing its employees to external opportunities.Training investment per employee is calculated using this formula: Total Training Costs / Number of Employees.Similar to many other KPIs mentioned here, there is no hard and fast rule for determining an acceptable training investment amount. The COO must strive to meet and exceed the industry average.
It is important to create COO KPIs that are tailored to each business. No two companies are built the same and no two COOs have the same management style. However, it is paramount for any COO to identify the company’s most important metrics and give them visibility. If you’re interested to learn more about COO KPIs, continue reading here.