| Financial Performance Measurement | | | | are only responsible for the same. As the name |
| The motive of every business is to achieve the | | | | suggests, this approach makes the companies |
| bottom line of maximum financial benefits. In order to | | | | 99.99966% error free. As it has its long term |
| comply with the same, companies have come up with | | | | accountability as well, it can be used over the financial |
| financial performance measurement techniques. The | | | | performance measurement techniques. |
| very idea is to ensure that no matter what the | | | | Theory of Constraints |
| resources do and the way they function, they would | | | | This theory deals with continuously helping the |
| have to show profits in the profit and loss statements. | | | | organizations in achieving their goals. The concept is |
| It is carried out generally in three different steps. They | | | | more applicable these days because it identifies the |
| have been mentioned as follows: | | | | constraints that lie in the path of the business. It is |
| Firstly, it encompasses selecting the goals of the | | | | carried in a five-step process. This has been |
| organization. | | | | mentioned as follows: |
| Secondly, and also as the most important part, it is to | | | | * Firstly, identification of the constraints is done. |
| consolidate the measurement of information with | | | | * Then, the companies decide the ways of constraint |
| respect to the performance. | | | | exploitation. |
| Finally, the required changes made by the managers | | | | * It makes the entire system aligned as per as the |
| so as to serve as a remedy over the weak links in the | | | | decision taken. |
| financial charts of the company. So, one can say that | | | | * Then, a negative strategy is used to increase the |
| the financial aspects of performance measurement is | | | | capacity of the organizations to handle more |
| basically sales driven. There are certain milestones that | | | | constraints. |
| companies set for employees. A deficiency in being | | | | * Then, the companies' see whether the constraints |
| able to fulfil even a certain process can be harmful for | | | | have been removed as a result of this. If it hasn't then |
| the position. So, this method of performance | | | | they go back at identification part. (Constraint |
| measurement is also known to show certain insecurity | | | | Management, 2010) |
| for the employees. Hence, it might not give the most | | | | Advantages of Non-financial aspects and |
| authenticated results. Business Performance | | | | Disadvantages of Financial aspects |
| Management is by and large measured by the financial | | | | The biggest disadvantage of the financial aspect is |
| aspects of performance measurement. The specific | | | | that it does not consider the broad view of the |
| techniques for the same have been mentioned as | | | | business. The companies have to give maximum |
| follows: | | | | regard to the available monetary benefits. If this is not |
| Approaches to Financial Performance Measurement | | | | reached, the management would not recommend for |
| Economic Values Added | | | | a certain activity to take place as a part of its |
| This method deals directly with the economic profit of | | | | functioning. There have been many companies in the |
| the organization that goes directly into the balance | | | | past which have lost to great extents because of |
| sheets. This method in other words can be used to | | | | such a disastrous situation. One can take IBM for |
| measure the Net Operating Profit after Taxes. There | | | | example. The company could not sustain the fact that |
| are also certain adjustments that are made in the | | | | it was not making immediate profits. As a result, they |
| calculation of Economic value added so that the | | | | sold their laptop manufacturing and saw the other |
| companies can make it more synchronized with the | | | | company making huge benefits. |
| profit entry in the profit and loss statements. This | | | | An advantage of the non-financial aspect is that it |
| method is generally used by lower stature companies | | | | allows the time for training. We all know that training is |
| these days. The reason for the same is that at the | | | | one of those areas which consume a lot of money in |
| moment, the companies can afford to look at the | | | | the beginning. The immediate profits associated with |
| business functioning only from the financial perspective. | | | | the same might not be as much as compared to the |
| There is much more to achieve. | | | | amount of money put into doing it. But, the non-financial |
| Activity-Based Costing | | | | aspect gives respect to the long-term advantages |
| The fundamental law of economics says that | | | | associated with the training. This is generally not given |
| management would have to make the most from the | | | | any attention from the financial point of view which |
| least resources that are available to them. In regard to | | | | considers only the short run. |
| keeping with the statement, the companies generally | | | | The non-financial aspects build a reputation for a |
| identify the processes that are in the system and then | | | | company. It helps a company take up strategies like |
| classify them as separate activities. Followed by this, | | | | cost-differentiation. These strategies are extremely |
| the companies assign separate costs to each of the | | | | helpful in making a company the cost leader in the |
| activities. This can be done in the form of direct and | | | | market. The financial perspective might never give any |
| indirect costs. | | | | room for the same. Under the dynamic environment of |
| Reason for shift from Financial to Non-Financial aspect | | | | today, it become a must for companies to look for |
| In other words, we can say that this is also a form of | | | | strategies like this. |
| performance measurement on the basis of finance | | | | Conclusion |
| aspects. One can assign costs to each of the | | | | As most of the companies of today have further |
| activities, but then there are always, restrictions on the | | | | strengthened and even widened their visions, simply |
| use of the activities that are highly expensive. Once, | | | | looking for the monetary profits as a part of the |
| again, this method would not be applicable in the | | | | performance measurement criterion is not worth mush |
| long-run. The reason for the same is that this method | | | | scope. As for example, technology has been |
| forms a hindrance to the long-term investments. One | | | | advancing at a tremendous pace these days. This is |
| must understand that an investment for a particular | | | | because; organizations are putting in a huge amount of |
| activity can lead to improvements of certain others in | | | | money in Research and development. If the |
| the long run. This can be with respect to work force | | | | companies follow the economic value added approach |
| as well as the equipments that are required to perform | | | | or the activity-based costing approach, they would not |
| the activities. So, as a remedy, one has to switch to | | | | have the heart to invest to such large extents. In the |
| better methods that are of non-financial significance. | | | | short-term, they can have a good flow of cash with |
| (Activity Based Costing (ABC), 2010) | | | | them, but as we have seen companies like Procter & |
| Non-Financial Performance Measurement | | | | Gamble advance to such great extents, success at |
| These are amongst the most widely applicable | | | | the international level can only come through |
| performance measurement techniques in the current | | | | investment in technology. |
| scenario of the corporate world. We have seen the | | | | So, the method of financial performance measurement |
| deficiencies of the financial aspects. The following | | | | is not viable in the current era. It is certainly better to |
| methods tend to improve them for the betterment of | | | | use the non-financial aspects of performance |
| the organizations: | | | | measurement as we have seen. The reason for the |
| Approaches to Non- Financial performance | | | | same is that they aim for the development of the total |
| measurement | | | | quality of the products. In this era of completion where |
| Six-Sigma Approach | | | | the product life cycles are dependent on the efficiency |
| The best approach for performance measurement is | | | | of the companies to be able to maintain their products |
| the six sigma approach. In this method, the companies | | | | in the market, companies need to focus more on |
| try to identify the deficiencies in each of the processes | | | | customer satisfaction than anything else. This is |
| that are a part of the functioning of the organization. | | | | possible to a larger extent in non-financial performance |
| These are then corrected by certain quality analysis | | | | measurement. |
| tools. The companies also have special people who | | | | |