Financial Performance Measurement and Analysis
Added on 2020-02-05
13 Pages4460 Words68 Views
|
|
|
FINANCIAL AND NON-FINANCIALMEASURES
TABLE OF CONTENTSESSAY.......................................................................................................................................3INTRODUCTION......................................................................................................................3Financial and Non-financial Measures.......................................................................................3CONCLUSION........................................................................................................................10REFERENCES.........................................................................................................................112
ESSAYINTRODUCTION Every business organization needs to determine their financial as well as non-financial performance. Financial accounting aims at measuring the performance of businessin terms of finance management. Hence, it is a part of performance management.Determining company’s profitability and financial position are the most important financialmeasurement. Along with this, organizations also need to measure their non-financialperformance to achieve their set business targets and objectives. In the present essay, it willbe discussed that how firms make use of both the traditional financial measure and non-financial measure in the performance management. The present essay will carry out thecritical discussion of traditional financial measures such as profitability statement, balancesheet, ratio analysis and cash flow statement. Moreover, NFPI tools such as balancescorecard, performance pyramid and building block model will be critically evaluated. Thecritical discussion will be done as per the view points of different authors that help toevaluate the significance and drawbacks of FPI and NFPI in managing firm's performance. Financial performance measurement tools revolves around analysing organization'sspendings, revenues, profitability, liquidity, solvency, cash flow capacity and others. In otherwords, it is a quantitative measurement. Thus, it does not reflect total manager's contributionto the firms. NFPI will be greatly helpful in analysing overall managerial contribution. It willassist users to determine long term business performance. Present essay will taken intoconsideration that how financial tools provide assistance to measure organizationperformance. Moreover, it describe the consequences of this analysis as per literature review.However, it will discuss the importance and drawbacks of NFPI such as BS, performancepyramid and building block model. The critical discussion of the FPI and NFPI will guide usto managing business performance. FINANCIAL AND NON-FINANCIAL MEASURES According to White, Sondhi and Fried (2003), financial performance of the businesscan be measured in monetary terms. Every business organization aims at maximizing theirprofitability, long term survival and business growth. Enterprises make use of invested fundsto earn great amount of profits. Thus, all the operating activities have been done so as to getgood profitability. However, ability of the organization to run business for a long term periodis known as business survivals and measures the success of company. Furthermore, manager3
aims at running a successful business in order to make organizational growth. However, Cheeand et.al., (2006), said that non-financial measure includes internal operating measure as wellas employee and customer-oriented measures. Production volume, productivity, defects,waste management, introducing new product, cycle time, operating efficiency and inventorylevels are internal measures. On contrary, according to Bharadwaj (2015), employeesatisfaction, staff turnover, workers training, skills, absence rate and safety measurement arethe employee oriented measures whilst market share, customer acquisition, retention, deliveryperformance, waiting time and customer complaints are customer-oriented measures. As per the view point of Minnis and Sutherland (2015), profitability statement helpsto determine the results of operating business functions. The author said that this statementcombines incurred business expenditures and revenues for a fixed period of time. The surplusof incomes over the expenses will indicate profits for the enterprise and shows betterperformance while excessive business payments contribute to loss and indicate poorperformance. According to Barnett, Michael and Robert (2012), high profitability indicatesbetter operational results while decreasing profitability is a sign of worst performance.Moreover, it helps managers to determine the operating efficiency of business. However,according to Titman, Martin and Keown (2015), it has been critically evaluated that thestatement does not provide information about the real business profits. The reason behind thisis that statement records transactions on accrual concept; hence, it represents artificial profits.Under the accrual basis, transactions are recorded at the time of occurrence whether it hasbeen received in cash or not. Therefore, it is not a better measurement of company'soperational performance.According to Fraser and Ormiston (2015), balance sheet is a tool to measure financialperformance of the company. It is a summarized statement of all the assets such as fixed aswell as current assets and all the liabilities in terms of both the long term and short term.Assets are the sources that will be used to generate profits whilst liabilities are the outsidefinancial sources such as creditor’s bank loan, overdraft and accounts payable. Moreover, thestatement helps to determine the proportion of owner's share on the business assets that iscalled equity. Thus, it helps to represent the financial position of business. On the contrary,Bédard and Courteau (2015), critically evaluated that balance sheet is not a good performancemeasurement as it is a time consuming process and determines financial status at a specifieddate only. Likewise, Ongore and Kusa, (2013), said that initially, business needs to preparejournal, ledger, trial balance, trading as well as profit and loss account for preparing balancesheet; thus, it takes very much time. Further, in case of any mistakes in transaction recording4
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents