How Does A Job-Costing System Differ From A Process-Costing System Advantages of Non-Financial Performance Measurement Over Financial Performance Measurement

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Advantages of Non-Financial Performance Measurement Over Financial Performance Measurement

Measurement of financial performance

The motive of every business is to achieve the bottom line of maximum financial benefits. To comply with the same, companies have developed techniques for measuring financial performance. The very idea is to ensure that no matter what the assets do and how they function, they should show profits in the profit and loss accounts. It generally takes place in three different phases. They have been mentioned as follows:

First, it includes the organization’s target selection.

Secondly, and even more importantly, is consolidating the measurement of information versus performance.

Finally, the necessary changes made by managers to remedy the weak links in the company’s financial charts. Hence, it can be said that the financial aspects of performance measurement are basically driven by sales. There are certain milestones that companies set for employees. A deficiency in the ability to fulfill even a certain process can be detrimental to the position. Hence, this method of performance measurement is also known to show some insecurity for the employees. Therefore, it might not provide the most authenticated results. Business Performance Management is largely measured by the financial aspects of performance measurement. The specific techniques for the same have been mentioned as follows:

Approaches to measuring financial performance

Economic added value

This method deals directly with the economic profit of the organization which goes directly into the balance sheets. This method, in other words, can be used to measure net operating income after tax. There are also some adjustments that are made to the calculation of economic value added so that companies can make it more synchronized with the posting of profit in the income statement. This method is generally used by companies of smaller stature these days. The reason is that at the moment companies can only afford to look at the functioning of the business from a financial point of view. There is so much more to get.

Activity-based costing

The basic law of economics states that management should make the most of the least resources at its disposal. In regards to compliance with the statement, companies generally identify the processes that are in the system and then classify them as separate activities. Subsequently, the companies assign separate costs to each of the activities. This can be done in the form of direct and indirect costs.

Reason for moving from financial to non-financial aspect

In other words, we can say that this too is a form of performance measurement based on financial aspects. You can assign costs to each of the assets, but then there are always restrictions on the use of assets that are very expensive. Again, this method would not be applicable in the long run. The reason for the same is that this method forms a barrier to long-term investment. It must be understood that an investment in a particular business can lead to improvements in some others in the long run. This may relate to the manpower and equipment needed to carry out the activities. So, as a remedy, one has to turn to better methods that have no financial significance. (Activity Based Costing (ABC), 2010)

Non-financial performance measurement

These are among the most widely applicable performance measurement techniques in today’s corporate world. We have seen the shortcomings of the financial aspects. The following methods tend to improve them for the betterment of organizations:

Approaches to measuring non-financial performance

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 functioning of the organization. These are then corrected by some quality analysis tools. Companies also have special people who are only responsible for them. As the name suggests, this approach makes companies 99.99966% error free. Since it also has its long-term liability, it can be used on financial performance measurement techniques.

Theory of Constraints

This theory is concerned with continuously helping organizations achieve their goals. The concept is more applicable these days because it identifies the constraints that are in the path of the business. It is done in a five-step process. This was mentioned as follows:

* First, constraint identification is done.

* Then, the companies decide how to exploit the bond.

* Makes the whole system aligned according to the decision made.

* Hence, a negative strategy is used to increase the organizations ability to handle more constraints.

* Then, the companies check if the constraints have been removed as a result of this. If not, they go back to the identification part. (Constraint Management, 2010)

Advantages of non-financial aspects and disadvantages of financial aspects

The biggest disadvantage of the financial aspect is that it doesn’t consider the big picture of the business. Companies must give maximum regard to the monetary benefits available. If this is not achieved, management would not recommend that a certain activity take place as part of its operation. There have been many companies in the past who have lost to a large extent due to such a dire situation. You can take IBM for example. The company could not argue that it was not making immediate profits. As a result, they sold their laptop production and saw the other company gain huge benefits.

An advantage of the non-financial aspect is that it allows time for training. We all know that training is one of those areas that eat up a lot of money in the beginning. The immediate profits associated with the same may not be as much as the amount of money invested to do so. But the non-financial aspect outweighs the long-term benefits associated with the training. This is generally not given any attention from a financial point of view which only considers the short term.

Non-financial aspects build a reputation for a company. It helps a company adopt strategies such as cost differentiation. These strategies are extremely helpful in making a company the cost leader in the market. The Financial Perspective may never allow room for the same thing. In today’s dynamic environment, it has become a must for businesses to look for strategies like this.

Conclusion

Since most of today’s companies have further strengthened and even expanded their visions, simply pursuing monetary returns as part of the performance metric isn’t worth it. For example, technology is advancing at an incredible pace these days. This is why; organizations are investing huge amounts of money in research and development. If companies followed the economic value-added approach or the activity-based cost approach, they would not be brave enough to invest to such a large extent. In the short term, they may have good cash flow with them, but because we’ve seen companies like Procter & Gamble progress to such a large extent, international success can only come through investments in technology.

Therefore, the financial performance measurement method 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 is that they aim at the development of the total quality of the products. In this age of completion where product lifecycles depend on companies being efficient to keep their products on the market, companies need to focus more on customer satisfaction than anything else. This is possible to a greater extent in the measurement of non-financial performance.

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