Question

What are some advantages of using non-financial performance measures? What are some reasons that non financial performance measures at an operational level may not lead to improved profitability ?

Answer 1

Ans. There are Some Non-Financial performance measures Advantages.

(1) The non-financial measures are better for looking at the organization's long term strategies rather than the financial measures that focus on short-term or annual strategies. if companies were to include these non-financial measures into their strategy & communicate the objectives to the managers, with some incentives, it would be simpler to address the long term strategies that are important to the comapany.

(2) Non-financial measures include the intangible assets that financial measures do not include on the balance sheet intangible assets are things like intellectual capital and customer loyalty. these can be difficult to quantify however one study shows that measures like innovation, management, capability, employee relations, brand value and quality accout for a large portion of the company's value to customers.

(3) Non-financial measures can be better at indicationg the future financial performance of a company. as stated earlier, financial measure are not as good at capturing the long-term performance of a firm, under US GAAP, Research and Development expenditures and marketing costs are to be charged in the period they are incurred and this over a period of time. however non-financial measures would show that successful research could improve future profits.

(4) Non-financial measures have lack of statical reliability meaning it is difficults to know whether or not the measure is actually measuring what it is supposed to measure or just getting lucky through random error, moreover, customer satisfaction surveys generallly have very few people answer and have very few questions to answer. this creates poor statistical reliability because there are simple questions and answers for a complex area.

(5) There tends to be too many non-financial performance measures put into place this can cause "measurement disintegration," which is when thare are too many measures and it dilutes the effect of the measurement process in other words mangers too much and end up gaining little in the important areas.  

These are some reasons that non-financial performance measures at an operational level may not lead to improved profitability

(1) Time & Cost has been a problem for improve profitability some companies found the cost of system that tracks a large number of non-financial measures can be greater than its benefits development can consume considerable time and expense.

(2) Bureaucracies can be a reason of non financial performance measures at an operational lavel may not lead to improved.  

(3) Non-financial data are measured in many ways there are no common denominator