Use of non-financial measures in performance evaluation
Content Traditional Financial Performance Definitions Examples Pros and Cons of Non-financial measures Mistakes and Solutions Conclusion
Traditional Financial Performance They only tell what has happened over a limited period in the immediate past; They give you no indication of what is going to happen in the future; They do not relate to the strategic management of the business etc.
Definitions The financial measures show the impact of the firm’s policies and procedures on the firm’s current financial position and its current return on shareholders. The nonfinancial factors show the firm’s current and potential competitive position.
Examples: Financial Measures of Success Non-financial Measures of Success Sales growth Earning growth Dividend growth Bond and credit ratings Cash flow Increase in stock price Customer Measures Market share and growth in market share On-time delivery Customer satisfaction Brand recognition Position in favorable markets Internal Business Processes High product quality Manufacturing innovation High manufacturing productivity Cycle time Yield and reduction in waste Learning and Innovation (Human Resources) Competence and integrity of managers Morale and firmwide culture Education and training Innovation and new products and manufacturing methods
A process is a sequence of activities linked together for performing a particular task. Example: Input Activity or Process Output Inputs: Employee training Employee experience Number of new menu items Number of employees Fryer reliability Fountain supply availability Outputs: Line wait Percent order accuracy Friendly service score Activity Counter service
Advantages Closer link to long-term organizational strategies; Can provide indirect, quantitative indicators of a firm's intangible assets; Can be better indicators of future financial performance; Less susceptible to external noise than accounting measures
Disadvantages Time and Cost; Measures in many ways; Lack of causal links; Lack of statistical reliability “Measurement disintegration”
Mistakes Not linking measures to strategy Not validating the links Not setting the right performance targets Measuring incorrectly
Solutions Develop a casual model; Pull together the data; Turn data into information; Continually refine the model; Base actions on findings.
Conclusion Non-financial measures are increasingly important in decision – making and performance evaluation; Companies should not simply copy measures used by others; The choice of measures must me linked to factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. Performance measurement is a dynamic process, etc.
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