top-rated free essay

Advantage of Non-Financial Measures

By Allen175 Mar 28, 2010 578 Words
advantages
Non-financial measures offer four clear advantages over measurement systems based on financial data. First of these is a closer link to long-term organizational strategies. Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do not deal with progress relative to customer requirements or competitors, nor other non-financial objectives that may be important in achieving profitability, competitive strength and longer-term strategic goals. For example, new product development or expanding organizational capabilities may be important strategic goals, but may hinder short-term accounting performance. By supplementing accounting measures with non-financial data about strategic performance and implementation of strategic plans, companies can communicate objectives and provide incentives for managers to address long-term strategy. Second, critics of traditional measures argue that drivers of success in many industries are "intangible assets" such as intellectual capital and customer loyalty, rather than the "hard assets" allowed on to balance sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data can provide indirect, quantitative indicators of a firm's intangible assets. One study examined the ability of non-financial indicators of "intangible assets" to explain differences in US companies' stock market values. It found that measures related to innovation, management capability, employee relations, quality and brand value explained a significant proportion of a company's value, even allowing for accounting assets and liabilities. By excluding these intangible assets, financially oriented measurement can encourage managers to make poor, even harmful, decisions.

We Suggest...

Jeremy Siegel on the Market: Rough Going for Now, but Stocks Still a Good Bet

Re-examining Stock Options as a Way to Compensate Executives

Measures That Matter: Aligning Performance Measures With Corporate Strategy

Building Companies That Leave the World a Better Place

The Art and Science of Measuring CEO Performance

Third, non-financial measures can be better indicators of future financial performance. Even when the ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now. Consider, for example, investments in research and development or customer satisfaction programs. Under U.S. accounting rules, research and development expenditures and marketing costs must be charged for in the period they are incurred, so reducing profits. But successful research improves future profits if it can be brought to market. Similarly, investments in customer satisfaction can improve subsequent economic performance by increasing revenues and loyalty of existing customers, attracting new customers and reducing transaction costs. Non-financial data can provide the missing link between these beneficial activities and financial results by providing forward-looking information on accounting or stock performance. For example, interim research results or customer indices may offer an indication of future cash flows that would not be captured otherwise. Finally, the choice of measures should be based on providing information about managerial actions and the level of "noise" in the measures. Noise refers to changes in the performance measure that are beyond the control of the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware of how much success is due to their actions or they will not have the signals they need to maximize their effect on performance. Because many non-financial measures are less susceptible to external noise than accounting measures, their use may improve managers' performance by providing more precise evaluation of their actions. This also lowers the risk imposed on managers when determining pay.

Cite This Document

Related Documents

  • Financial and Non Financial Motivators

    ...What financial and non financial motivators are used to motivate employees? Introduction It is important that a company makes the employee feel motivated. There are many reasons as to why they should do this. One of the reasons is that if an employee does not feel motivated then they may feel that their job is quite boring and therefore as a ...

    Read More
  • NON BANK FINANCIAL INSTITUTIONS

    ... a) What are the categories of non bank financial institutions? b) Give similarities and differences between non banking financial institutions and commercial banks. INT...

    Read More
  • Non banking financial intermediaries

    ...Non Bank Financial Intermediaries INTRODUCTION • NBFCs are privately owned, decentralized and relatively small-sized financial intermediaries. • Some are primarily engaged in fund-based activities and others provide financial services of diverse kinds. • The former are know as Non Banking Financial Companies (NBFCs) and the latte...

    Read More
  • Non Financial Performance Indicators

    ...‘In today's worldwide competitive environment companies are competing in terms of product quality, delivery, reliability, after-sales services and customer satisfaction.' (Chairman, FTSE 100 Company, 2003) Discuss the validity of the continuing emphasis by companies and analysts on traditional financial ratio analysis. Does this analysis ...

    Read More
  • Non Financial Reporting

    ...STAKEHOLDER ENGAGEMENT THROUGH NON- FINANCIAL REPORTING RESEARCH REPORT MMPA 516 SUBMITTED BY Name: Rajat Chawla Student ID: 300256730 TABLE OF CONTENTS Executive Summary………………………………………………………………………….. i ...

    Read More
  • Non Banking Financial Institutions

    ...Non Banking Financial Institutions Non-Banking Financial Institutions (NBFI) v/s Banks in India – Why NBFI are doing much business than Banks? A study of Kolkata based Upper and Middle Class Consumers.   INTRODUCTION In the era of globalization and liberalization the development of financial sector has played and important role in the eco...

    Read More
  • Non Financial Factors

    ...I-Introduction This report will evaluate the financial performance of Tesco’s and comparing it to Marks and Spencer’s has the purpose of evaluating the company's worthiness as investment. As a well knowing company around the world and having an important background in the retail environment Tesco’s is one of the largest supermarkets in th...

    Read More
  • Non Banking Financial Companies

    ...Manual on Financial and Banking Statistics 6. NON-BANKING FINANCIAL COMPANIES The importance of NBFCs in delivering credit to the unorganised sector and to small borrowers at the local level in response to local requirements is well recognised. The rising importance of this segment calls for increased regulatory attention and focused su...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.