Advantages of non-financial performance measurement over financial performance measurement
Measuring financial performance
The motive of every business is to achieve maximum financial benefits. To accommodate the same, companies have come up with techniques to measure financial performance. The very idea is to ensure that no matter what the resources do and how they function, they will have to show profits in the profit and loss statements. It is usually done in three different steps. They are mentioned as follows:
First, it involves choosing the goals of the organization.
Secondly, and also as the most important part, is to consolidate the measurement of performance information.
Finally, the necessary changes made by managers to serve as a means of removing weak links in the company’s financial schemes. So it can be said that the financial aspects of performance measurement are mainly driven by sales. There are certain stages that companies set for employees. Not being able to perform even a certain process can be detrimental to the position. So this method of performance measurement is also known to show some uncertainty for employees. Therefore, it may not give the most authenticated results. Business performance management is generally measured by the financial aspects of performance measurement. The specific techniques for the same are mentioned as follows:
Approaches to measuring financial performance
Added economic values
This method deals directly with the economic profit of the organization, which goes directly to the balance sheets. In other words, this method can be used to measure net operating profit after taxes. There are also some adjustments that are made to the calculation of economic value added so that companies can make it more in sync with the recording of profit in the profit and loss statements. This method is generally used by lower growth companies these days. The reason for this is that currently companies can only afford to look at the operation of the business from a financial point of view. There is still much to achieve.
Activity-based assessment
The basic law of economics says that management must get the most out of the fewest available resources. In terms of assert compliance, companies typically identify the processes that are in the system and then classify them as separate activities. Companies then determine separate costs for each of the activities. This can take the form of direct and indirect costs.
Reason for moving from financial to non-financial aspect
In other words, we can say that it is also a form of performance measurement based on financial aspects. One can assign costs to each of the activities, but then there are always restrictions on the use of the activities, which are very expensive. Once again, this method would not be feasible in the long run. The reason for this is that this method is a hindrance to long-term investments. One should understand that an investment for a certain activity may lead to improvements in some others in the long run. This can be in terms of manpower as well as the equipment that is required to carry out the activities. So, as a remedy, one should switch to better methods that are of non-financial importance. (Activity Based Assessment (ABC), 2010)
Measuring non-financial performance
These are among the most widely applicable performance measurement techniques in the current scenario of the corporate world. We have seen the disadvantages of the financial aspects. The following methods tend to improve them for the betterment of organizations:
Approaches to measuring non-financial results
Six Sigma approach
The best approach to measuring performance is the six sigma approach. In this method, companies try to identify deficiencies in each of the processes that are part of the organization’s functioning. They are then corrected by certain quality analysis tools. Companies also have special people who are only responsible for the same. As the name suggests, this approach makes companies 99.99966% error-free. Because it also has long-term accountability, it can be used over financial performance measurement techniques.
Theory of Constraints
This theory is concerned with continuously helping organizations achieve their goals. The concept is more applicable today because it identifies the constraints that lie in the way of business. It is done in a five step process. This is mentioned as follows:
* Constraints are identified first.
* Companies then decide how to use the restrictions.
* Makes the whole system aligned with the decision made.
* A negative strategy is then used to increase the organizations capacity to cope with more constraints.
* Companies then see if restrictions are lifted as a result. If not, they fall back to the ID part. (Constraint Management, 2010)
Advantages of non-financial aspects and disadvantages of financial aspects
The biggest disadvantage of the financial aspect is that it does not take into account the broad view of the business. Companies should pay maximum attention to the cash benefits available. If this is not achieved, management would not recommend that a particular activity be carried out as part of its operation. In the past, there have been many companies that have lost largely due to such a disastrous situation. We can take IBM as an example. The company could not sustain the fact that it was not making immediate profits. As a result, they sold off the laptop manufacturing and saw the other company make huge profits.
An advantage of the non-financial aspect is that it allows time for learning. We all know that training is one of those fields that costs a lot of money in the beginning. The immediate profits associated with the same may not be as much as compared to the amount of money invested in it. But the non-financial aspect takes into account the long-term benefits associated with training. This is usually overlooked from a financial perspective that only looks at the short term.
Non-financial aspects build a company’s reputation. It helps a company to adopt strategies like cost differentiation. These strategies are extremely useful in making a company a cost leader in the market. The financial perspective may never give room for the same. In today’s dynamic environment, it becomes imperative for companies to look for strategies like this.
Conclusion
Since most of today’s companies have further strengthened and even expanded their visions, simply looking for monetary profits as part of the performance measurement criterion is not worth much. For example, technology is advancing at a tremendous pace these days. It is this way because; Organizations invest a huge amount of money in research and development. If companies follow the economic value-added approach or the activity-based costing approach, they will not have the heart to invest in such large amounts. In the short term they may have good cash flow with them, but as we have seen companies like Procter & Gamble advance to such great degrees, success at the international level can only come through investment in technology.
So the method of measuring financial performance is not viable in the current era. It is certainly better to use the non-financial aspects of performance measurement, as we have seen. The reason for the same is that they aim to develop the overall quality of the products. In this era of completion, where product life cycles depend on the efficiency of companies to keep their products in the market, companies must focus more on customer satisfaction than anything else. This is possible to a greater extent when measuring non-financial results.
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