FINANCIAL AND NON FINANCIAL PERFORMANCE
NON-FINANCIAL PERFORMANCE INDICATORS- NFPI
These are measures of performance based on non-financial information which may originate in
and be used by operating departments to monitor and control their activities without accounting
input.
Why have they become important?
They have because of the limitations of financial performance indicators. Some of which
are:
i. Concentrate on too few variables
They focus entirely on those items that can be expressed in monetary terms and ignore
others that can’t for example strict cost cutting measures could be in place. These are
monetarily measurable but the about the staff morale or quality of the product?
ii. Lack of information on quality
Traditional accounting systems fail to provide information on quality or importance of
operations.
iii.
Measuring success does not ensure success
Financial measures simply measure success. What organizations need, however, are
indicators that ensure it. They should be linked to the company’s critical success factors
and are non-financial in nature.
iv.
Changes in cost structure
Modern technology requires investment and product life cycles are now shorter. Greater
proportion of costs are sunk and greater are planned or engineered into a product
before production
v.
Changes in competition
In modern competition, firms have moved away form competing on the basis of
measurable financial indicators. Quality, after sales service, reliability etc are what they
are now competing on.
vi.
Changes in the manufacturing environment
Modern manufacturing techniques focus on minimizing throughput times, stock levels
and set up times. Managers can reduce the costs for which they are responsible by
increasing stock levels through maximizing output. With strict conformance to financial
aspects, managers may concentrate on cost reduction and ignore other important
strategic manufacturing goals.
A major advantage of NFPI is that they are less likely to be manipulated by managers than
financial indicators. This helps solve the problem of short termism and focus more attention
on the long run. Why? Concentrating on short term profit at any expense is detrimental to the
organization in the long run if NFPI are not taken into consideration. On the other hand, NFPI
will be numerous and if they are all presented information overload will be the result. This is
because some of the information may not be necessary or may send mixed signals making
decision making difficult. Furthermore, management focus too much on operational goals, they
may end up making sub-optimal decisions disregarding the overall strategy.
In the end a combination of both financial and non-financial indicators will be more successful.
Non-Financial Performance Indicators- NFPI are measures of performance based on
nonfinancial
information which may originate in and be used by operating departments to monitor
and control their activities without accounting input.
A major advantage of NFPI is that they are less likely to be manipulated by managers than
financial indicators.
An NPO is an organization whose attainment of its prime goal is not assessed by economic
measures.
Value for Money audits (VFM) can be defined as: “An investigation into whether proper
arrangements have been made for securing economy, efficiency and effectiveness in the use of
resources.” CIMA
Performance in NPO is usually judged in terms of inputs and outputs and thus the VFM criteria is
assessing performance based on the 3Es: economy, efficiency and effectiveness.
VFM audits are intended to help management do a better job by identifying waste and
inefficiencies
and recommending corrective action.
Value added statements VAS shows how much value has been created by the firms own
effort.
Based on CIMA official terminology, non financial performance indicators will be as
follows.
1. Personnel
- Number of complaints received
- Staff turnover
- Days lost through absenteeism
- days lost through accidents/sickness
- training time per employee
2. Marketing effectiveness
- Trend in market share
- Sales volume growth
- Customer visit per sales person
- Client contact hours per sales person
- Sales volume forecast Vs actual
- Number of customers
- Customer survey response information
3. Production performance
- Set up times
- Number of suppliers
- Day’s inventory in hand
- Output per employee
- Material yield percentage
- Schedule adherence
- Proportion of output requiring rework
- manufacturing lead times
4. Service quality
- Number of complaints
- Proportion of repeat booking
- Customer waiting time
- On time deliveries