Importance of Non-Financial Performance Measures in Business

Management Accounting
Management Accounting

Management Accounting
“To succeed in today’s highly uncertain environment, business organisations should
never rely completely on a control system that emphasises financial (or quantitative)
targets.
Introduction:
In the recent era, the complexity of businesses is increasing continuously due to various
reasons such as globalisation, technological advancements. Due to these changes in the
business world, the market is becoming an intensely competitive place where it is highly
required for the business organisations to measure their overall performance in both financial
and non-financial terms. Though it is correct that financial targets help to a great extent in
measuring the company’s performance but under the contemporary conditions of economic
development, the management of the company cannot solely rely on the control system that is
aimed at mere evaluation of quantitative targets for the successful operation of such
organisation. The major indicators of company’s performance are reflected by the level of
satisfaction it provides to its customers as well as its employees, the quality of the products in
which it deals, the product innovations it brings and the market share it holds. These factors
are essential to be considered while setting the targets against which firm’s performance shall
be measured. The financial evaluation systems of the companies merely focuses on the short-
term performance of the business and in the chase of those short term financial targets,
business organisation often ignores the importance of their qualitative performance. The non-
financial performance is therefore necessary to achieve the long-term survival and growth of
business. Those companies which do not pay attention towards their non-performance
evaluation do not actually deal with their progress in the areas of meeting the customer’s
requirements. Also, they do not emphasise on those non-financial targets and objectives that
are vital to achieve the desired profitability of the business and for the fulfilment of longer
run strategic goals.

Management Accounting
Importance of quantitative targets:
Financial targets reflects aspects of achievements of business such as sales profitability,
return on capital invested etc. and these targets helps the managers to strengthen its financial
performance and enables them to ensure that wealth is created for its owners through the
business. Although determination of financial targets is vital in today’s competitive
environment but it is also necessary for the managers of the company to understand and give
due consideration to other factors that drives wealth creation. There must be some set of
benchmarks in the areas of employee satisfaction, customer loyalty, product innovation,
quality of products, target assets and so on (Otley, 2016). These factors are though difficult to
be quantified because of their intangibility but are equally important as the financial targets
and objectives.
Importance of qualitative measures of business performance:
In order to achieve the desired profitability as defined by the benchmarks the business,
organisations often compromises with the quality of the products and services they offer or
they exploit their employees to achieve the desired results so that they can be given
incentives in accordance with their performances. These practices undoubtedly enhances the
profitability of the companies in short term but affects the long-term stability of their business
adversely, thereby making them inefficient in the longer run (Velimirović, Velimirović &
Stanković, 2011). Thus, to ensure the long term viability of the business and to meet the
intense competitive forces of the market it has become topical for the business corporations to
create and implement a control system for the evaluation of non-financial indicators. The
traditional methods that evaluate the business performance on the basis of quantitative targets
do not take into consideration all the factors that affect or contribute to the development and
growth of the companies. The analysis of performance of the firm merely on the basis of