The Essay Highlights The Significance Of Non-financial Performance Indicators In Business. (70 Characters)

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Importance of quantitative targets

“To succeed in today’s highly uncertain environment, business organisations should never rely completely on a control system that emphasises financial (or quantitative) targets.

In the recent era, the complexity of businesses is increasing continuously due to various reasons such as globalisation, technological advancements. Due to these changes in the business world, the market is becoming an intensely competitive place where it is highly required for the business organisations to measure their overall performance in both financial and non-financial terms. Though it is correct that financial targets help to a great extent in measuring the company’s performance but under the contemporary conditions of economic development, the management of the company cannot solely rely on the control system that is aimed at mere evaluation of quantitative targets for the successful operation of such organisation. The major indicators of company’s performance are reflected by the level of satisfaction it provides to its customers as well as its employees, the quality of the products in which it deals, the product innovations it brings and the market share it holds. These factors are essential to be considered while setting the targets against which firm’s performance shall be measured. The financial evaluation systems of the companies merely focuses on the short-term performance of the business and in the chase of those short term financial targets, business organisation often ignores the importance of their qualitative performance. The non-financial performance is therefore necessary to achieve the long-term survival and growth of business. Those companies which do not pay attention towards their non-performance evaluation do not actually deal with their progress in the areas of meeting the customer’s requirements. Also, they do not emphasise on those non-financial targets and objectives that are vital to achieve the desired profitability of the business and for the fulfilment of longer run strategic goals.  

Financial targets reflects aspects of achievements of business such as sales profitability, return on capital invested etc. and these targets helps the managers to strengthen its financial performance and enables them to ensure that wealth is created for its owners through the business. Although determination of financial targets is vital in today’s competitive environment but it is also necessary for the managers of the company to understand and give due consideration to other factors that drives wealth creation. There must be some set of benchmarks in the areas of employee satisfaction, customer loyalty, product innovation, quality of products, target assets and so on (Otley, 2016). These factors are though difficult to be quantified because of their intangibility but are equally important as the financial targets and objectives.

In order to achieve the desired profitability as defined by the benchmarks the business, organisations often compromises with the quality of the products and services they offer or they exploit their employees to achieve the desired results so that they can be given incentives in accordance with their performances. These practices undoubtedly enhances the profitability of the companies in short term but affects the long-term stability of their business adversely, thereby making them inefficient in the longer run (Velimirovi?, Velimirovi? & Stankovi?, 2011). Thus, to ensure the long term viability of the business and to meet the intense competitive forces of the market it has become topical for the business corporations to create and implement a control system for the evaluation of non-financial indicators. The traditional methods that evaluate the business performance on the basis of quantitative targets do not take into consideration all the factors that affect or contribute to the development and growth of the companies. The analysis of performance of the firm merely on the basis of financial indicators often provides incomplete picture of true performance as the internal factors that are not measurable in financial terms but describes the internal potential of the company and its future perspectives are not considered (Kallio, Kallio & Grossi, 2017).

Importance of qualitative measures of business performance

The financial figures or the qualitative targets helps in assessing the business decisions that are taken in past but they do not necessarily takes into account the factors that are critical for the long term success of the business. Non-financial performance measures have an ensuing aim of focusing on the role of enhancing the loyalty towards the customers, attracting the potential customers, improving the image and reputation of the company. The said performance indicators though do not have significant relevance for the managers but they could be used to measure the financial performance of the company especially the future performance which is generally not reflected by the existing accounting indicators. The employee satisfaction can be measured by way of surveys. The company must measure its non-financial performance by considering the attitude of the employees towards their job, the recognition level and the rewards received by them, the autonomy level they have been granted in the company, the level of their participation in the decision making of the company, the degree of support received by them by their superiors. Further, there are some direct indicators of measuring the employee satisfaction. These indicators are: employee turnover rates or employees’ productivity rate etc. Further, customer loyalty could be measured by referring to the proportion of overall sales revenue generated from the current customers of the company, the % age of customers that are willing to renew their subscription with company. Furthermore, the product innovation level can be measured against the number of innovations made by company as compared to its competitors, the number of innovations that proved to be successful in market.

The non-financial targets help in creating closer links to the organisational long-run strategies. Further, it is argued that in various industries, the key drivers of success are the intangible assets like intellectual capital and the customer loyalty and not the hard assets that can be easily quantified in the accounting records (Banker, Potter & Srinivasan, 2000). These drivers must be taken into account to evaluate the overall performance of the business. The exclusion of intangibles like employees’ relations, brand value, product quality and innovativeness, management capability from the books of accounts may lead to poor and even harmful decision making. Investment in those activities that enhances the customer satisfaction can certainly improve the economic performance of the business (Sessoms, 2018).  

In the current times, general beliefs concerning the financial measures have changed. Earlier the financial measures were considered as the fundamental factors for the performance measures but these measures are being considered as only one aspect among various important aspects. The growing concerns about employee satisfaction, product innovation, customer loyalty have made the firms to undercut the financial strategies and to devise new measures that can truly support the long term success of their businesses (Jakobsen, 2017).

The well recognised international business corporations such as Pepsi Co and Coca Cola are nowadays attaching significant importance to qualitative i.e. non-financial targets and measures of performance in order to remain competitive in the market. These organisations have designed their compensation plans in such way that the bonuses and invectives of the managers are linked to achievement of non-financial targets along with the conventional financial targets (Fullerton & Wempe, 2009).  Their non-financial targets includes the market oriented measures such as quality, customer attitudes and feedbacks for their products and services, the market shares that they have grabbed and the level of motivation they instil in their employees.

How non-financial performance of business can be measured?

There are various techniques which have been introduced as a part of advancement management accounted that helps the organisation to set its financial as well as non-financial targets and measure their performance against such targets. Balance scorecard is one of those most prominent techniques that are being used by the managers of successful and highly competitive business organisations so that their performance in the holistic manner. BSC helps in identification; measurement and the display of non-financial performance measures and takes into account financial perspective, client perspective, internal business perspective and the internal growth i.e. the product innovation and learning perspective (Davis & Albright, 2004). Under the framework of BSC, the financial indicators of performance are supplemented by 3 types of performance evaluators in relation to client satisfaction, internal business processes and the company’s ability to learn and grow. It has been argued by the creators of balanced scorecard that the qualitative measures are better indicators of company’s financial performance in future. This claim of Kalpan and Norton is asserted on the basis of observation that quantitative measures only represent the effect of present managerial actions on the company in a partial way. These indicators omit the impact of actions taken by management in present (Gunasekaran, Patel &  MihtcGaughey, 2004).

The assessment of business performance on the basis of both financial as well non-financial measures has its both advantages and disadvantages. It is a true fact that mere consideration of quantitative aspects of the business does not help the business organisation in attaining long term sustainability hence consideration of qualitative aspects has its own importance for the success of business. However, assessment of qualitative performance of the business is a complicated process as it involves considerable time as it requires additional time to explain the employees of the company the significance of non-financial performance evaluation system and also it requires accumulation of large amount of information. It is quite complex to determine the benchmarks against which qualitative performance of business can be measured (Cohen, Holder-Webb, Nath & Wood, 2012). Secondly, it is difficult to measure the actual performance against the qualitative targets. Consideration of both financial as well as non-financial measures makes the firm compromise with one of the measures as some of the performance indicators or targets are expressed in time, units while others in financial (quantitative) units or percentages. Consequently a wide range of non-financial targets could lead to imprecise or erroneous measurement of the qualitative performance of the business which in turn leads to incorrect decision making by the managers. Further, non-financial targets also suffer from the limitation of statistical reliability because most of the non-financial performance data is gathered through surveys under which there various respondents but limited questions (Smith, 1995).

After examining the limitations of implementing the control system under which qualitative aspects of the business performance must be given due consideration, it is important to understand that the benefits of having the system of balanced scorecard or any other technique through which non-financial performance of the business can be measured, are greater than its limitations.

Advantages of setting non-financial benchmarks in business

Conclusion:

From the above study, it can now be concluded that financial targets such as sales, returns, profits acts as the sole measures of the performance which at times fails to offer information regarding the intangibles which also contributes to the success of the business. The method or approach that the firm uses to measure its performance impacts the company culture. Balance scorecard integrates the financial as well as non-financial targets and goals of the business so as to allow the business organisations to create cohesiveness and achievement of common goals by the different interest groups. The consideration of non-financial targets and objectives of the organisation enhances the quality of communication, clarifies the true intention of the company and also helps in making strategic use of both tangible as well as non-tangible assets. An organisation that relies entirely on its financial performance and is concerned only about achieving the quantitative aspects of the business can achieve success in short run but in long run these financial targets will become meaningless if qualitative aspect of business is not considered. From the above evaluation of importance of consideration of non-financial performance of the business it is clear that inclusion of qualitative factors while measuring the overall business performance of an organisation may leads to certain complexities and it might consume more time to collect information in those non-financial areas it is highly recommended to the business organisations to adopt the system of balanced scorecard so that all the relevant areas of performance be it financial areas or non-financial areas such as customer satisfaction, product innovation, company’s learning or growth perspectives must be given equal importance which will ultimately help the company to maintain an adequate balance of its overall business performance.

References:

Banker, R.D., Potter, G. and Srinivasan, D., 2000. An empirical investigation of an incentive plan that includes nonfinancial performance measures. The accounting review, 75(1), pp.65-92.

Cohen, J.R., Holder-Webb, L.L., Nath, L. and Wood, D., 2012. Corporate reporting of nonfinancial leading indicators of economic performance and sustainability. Accounting Horizons, 26(1), pp.65-90.

Davis, S. and Albright, T., 2004. An investigation of the effect of balanced scorecard implementation on financial performance. Management accounting research, 15(2), pp.135-153.

Fullerton, R.R. and Wempe, W.F., 2009. Lean manufacturing, non-financial performance measures, and financial performance. International Journal of Operations & Production Management, 29(3), pp.214-240.

Gunasekaran, A., Patel, C. and McGaughey, R.E., 2004. A framework for supply chain performance measurement. International journal of production economics, 87(3), pp.333-347.

Jakobsen, M., 2017. Consequences of intensive use of non-financial performance measures in Danish family farm holdings. Qualitative Research in Accounting & Management, 14, pp. 137-156.

Kallio, K.-M., T. J. Kallio and G. Grossi, 2017. Performance measurement in universities: ambiguities in the use of quality versus quantity in performance indicators. Public Money & Management, 37, pp. 293-300

Otley, D., 2016. The contingency theory of management accounting and control: 1980-2014. Management Accounting Research, 31, pp. 45-62.

Sessoms, G. 2018. The Importance of the Non-Financial Objectives Theory. Available at: https://smallbusiness.chron.com/importance-nonfinancial-objectives-theory-37874.html Accessed on: 30.11.2018.

Smith, P., 1995. On the unintended consequences of publishing performance data in the public sector. International Journal of Public Administration 18, pp. 277-310.

Velimirovi?, D., Velimirovi?, M. and Stankovi?, R., 2011. Role and importance of key performance indicators measurement. Serbian Journal of Management, 6(1), pp.63-72.