Advantages of non-financial performance measurement over financial performance measurement

Measurement of financial performance

The motive of every business is to achieve the end result of maximum financial benefits. To comply with it, companies have devised techniques for measuring financial performance. The very idea is to ensure that no matter what the resources do and how they work, they should show a profit on the profit and loss statements. It is generally carried out in three different steps. They have been mentioned as follows:

First, it encompasses the selection of organizational goals.

Second, and also more importantly, is to consolidate the measurement of information regarding performance.

Finally, the required changes made by managers to remedy weak links in the company’s financial charts. Therefore, it can be said that the financial aspects of performance measurement are basically based on sales. There are certain milestones that companies set for employees. A deficiency in being able to comply with even a certain process can be detrimental to the position. Therefore, this performance measurement method is also known to show some insecurity for the employees. Therefore, it may not provide the most authenticated results. Business performance management is generally measured by the financial aspects of performance measurement. The specific techniques for the same have been mentioned below:

Approaches to measuring financial performance

Added Economic Values

This method deals directly with the economic benefit of the organization that goes directly to the balance sheets. This method, in other words, can be used to measure net operating profit after taxes. There are also certain adjustments that are made in the calculation of the Economic Value Added so that companies make it more synchronized with the entry of profits in the profit and loss statement. This method is generally used by smaller companies these days. The reason for the same is that, at the moment, companies can afford to see the operation of the business only from the financial perspective. There is much more to achieve.

Activity Based Costing

The fundamental law of economics says that management would have to make the most of the minimal resources that are available to them. As far as sticking to the statement, companies generally identify the processes that are in the system and then classify them as separate activities. Following this, companies allocate separate costs to each of the activities. This can be done in the form of direct and indirect costs.

Reason for change from financial to non-financial aspect

In other words, we can say that this is also a way of measuring performance based on financial aspects. One can assign costs to each of the activities, but then there are always restrictions on the use of activities that are very expensive. Once again, this method would not be applicable in the long term. The reason for the same is that this method constitutes an obstacle for long-term investments. One must understand that an investment for a particular activity can lead to the improvement of certain others in the long term. This can be with respect to the workforce as well as the equipment that is required to perform the activities. So, as a remedy, one has to switch to better methods that are financially unimportant. (Activity Based Costing (ABC), 2010)

Non-financial performance measurement

These are among the most widely applied performance measurement techniques in the current scenario of the corporate world. We have seen the shortcomings of the financial aspects. The following methods tend to improve them for the betterment of organizations:

Approaches to non-financial performance measurement

Six Sigma Approach

The best approach to performance measurement is the Six Sigma approach. In this method, companies try to identify deficiencies in each of the processes that are part of the functioning of the organization. These are then corrected by certain quality analysis tools. Companies also have special people who only take care of them. As the name suggests, this approach makes businesses 99.99966% error free. Since it also has long-term responsibility, it can be used on top of financial performance measurement techniques.

Theory of Constraints

This theory tries to continuously help organizations in achieving their goals. The concept is more applicable these days because it identifies the constraints that stand in the way of business. It is carried out in a five-step process. This has been mentioned as follows:

* First, the constraints are identified.

* Then, the companies decide the forms of exploitation of the restrictions.

* Aligns the entire system according to the decision made.

* A negative strategy is then used to increase the organizations ability to handle more constraints.

* Businesses will then see if restrictions have been lifted as a result of this. If not, they return to the identification part. (Restrictions Management, 2010)

Advantages of non-financial aspects and disadvantages of financial aspects

The biggest disadvantage of the financial aspect is that it does not consider the broad vision of the business. Companies have to give maximum consideration to the monetary benefits available. If this is not achieved, management would not recommend that a certain activity be carried out as part of its operation. There have been many companies in the past that have lost heavily due to such a disastrous situation. One can take IBM for example. The company could not sustain the fact that it was not making immediate profits. As a result, they sold their laptop manufacturing and saw the other company make huge profits.

An advantage of the non-financial aspect is that it allows time for training. We all know that training is one of those areas that consumes a lot of money at the beginning. The immediate gains associated with it may not be that much compared to the amount of money invested to make it. But, the non-financial aspect gives respect to the long-term benefits associated with training. This generally does not receive any attention from a financial point of view that considers only the short term.

Non-financial aspects build a reputation for a company. It helps a company adopt strategies such as cost differentiation. These strategies are extremely useful in making a company a cost leader in the market. The financial outlook may never bring about the same thing. Under today’s dynamic environment, it becomes an obligation for companies to pursue strategies like this.

conclusion

As most companies today have strengthened and even expanded their visions, it is not worth simply looking for monetary gains as part of the performance metric. Like for example, technology has been advancing at a tremendous rate these days. This is because; Organizations are investing a great deal of money in research and development. If companies follow the economic value-added approach or the activity-based costing approach, they would not have the courage to invest in such large amounts. In the short term, they can have good cash flow with them, but as we have seen companies like Procter & Gamble come a long way, success internationally can only come through investment in technology.

Therefore, the financial performance measurement method is not viable in the current era. Clearly, it is better to use the non-financial aspects of performance measurement, as we have seen. The reason for the same is that they aim at the development of the total quality of the products. In this era of completion where product lifecycles depend on how efficient companies are to keep their products on the market, companies need to focus more on customer satisfaction than anything else. This is possible to a greater extent in non-financial performance measurement.

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