Management Accounting: Balancing Financial and Non-Financial Metrics

This report delves into the evolving landscape of management accounting, arguing that businesses should not solely rely on financial targets for performance evaluation in today's complex environment. It emphasizes the significance of non-financial metrics such as customer satisfaction, employee engagement, product innovation, and market share, which are critical for long-term survival and growth. The report explores the importance of both quantitative and qualitative measures, highlighting the limitations of focusing solely on short-term financial gains and the need for a balanced approach. It discusses how non-financial performance can be measured, including employee surveys and customer loyalty metrics, and the advantages of setting non-financial benchmarks. Furthermore, the report introduces the Balanced Scorecard as a key technique for integrating financial and non-financial targets, allowing organizations to create cohesiveness and achieve common goals. The report concludes that while the assessment of business performance on both financial and non-financial measures has its advantages, the benefits of a comprehensive system far outweigh its limitations. It stresses that a holistic approach, incorporating both tangible and intangible assets, is essential for sustained success in the modern business environment.

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

Management Accounting
financial indicators often provides incomplete picture of true performance as the internal
factors that are not measurable in financial terms but describes the internal potential of the
company and its future perspectives are not considered (Kallio, Kallio & Grossi, 2017).
How non-financial performance of business can be measured?
The financial figures or the qualitative targets helps in assessing the business decisions that
are taken in past but they do not necessarily takes into account the factors that are critical for
the long term success of the business. Non-financial performance measures have an ensuing
aim of focusing on the role of enhancing the loyalty towards the customers, attracting the
potential customers, improving the image and reputation of the company. The said
performance indicators though do not have significant relevance for the managers but they
could be used to measure the financial performance of the company especially the future
performance which is generally not reflected by the existing accounting indicators. The
employee satisfaction can be measured by way of surveys. The company must measure its
non-financial performance by considering the attitude of the employees towards their job, the
recognition level and the rewards received by them, the autonomy level they have been
granted in the company, the level of their participation in the decision making of the
company, the degree of support received by them by their superiors. Further, there are some
direct indicators of measuring the employee satisfaction. These indicators are: employee
turnover rates or employees’ productivity rate etc. Further, customer loyalty could be
measured by referring to the proportion of overall sales revenue generated from the current
customers of the company, the % age of customers that are willing to renew their subscription
with company. Furthermore, the product innovation level can be measured against the
number of innovations made by company as compared to its competitors, the number of
innovations that proved to be successful in market.

Management Accounting
Advantages of setting non-financial benchmarks in business:
The non-financial targets help in creating closer links to the organisational long-run
strategies. Further, it is argued that in various industries, the key drivers of success are the
intangible assets like intellectual capital and the customer loyalty and not the hard assets that
can be easily quantified in the accounting records (Banker, Potter & Srinivasan, 2000). These
drivers must be taken into account to evaluate the overall performance of the business. The
exclusion of intangibles like employees’ relations, brand value, product quality and
innovativeness, management capability from the books of accounts may lead to poor and
even harmful decision making. Investment in those activities that enhances the customer
satisfaction can certainly improve the economic performance of the business (Sessoms,
2018).
Shift in the general beliefs regarding the importance of financial measures of
performance:
In the current times, general beliefs concerning the financial measures have changed. Earlier
the financial measures were considered as the fundamental factors for the performance
measures but these measures are being considered as only one aspect among various
important aspects. The growing concerns about employee satisfaction, product innovation,
customer loyalty have made the firms to undercut the financial strategies and to devise new
measures that can truly support the long term success of their businesses (Jakobsen, 2017).
The well recognised international business corporations such as Pepsi Co and Coca Cola are
nowadays attaching significant importance to qualitative i.e. non-financial targets and
measures of performance in order to remain competitive in the market. These organisations
have designed their compensation plans in such way that the bonuses and invectives of the
managers are linked to achievement of non-financial targets along with the conventional

Management Accounting
financial targets (Fullerton & Wempe, 2009). Their non-financial targets includes the market
oriented measures such as quality, customer attitudes and feedbacks for their products and
services, the market shares that they have grabbed and the level of motivation they instil in
their employees.
Balanced Scorecard and its importance in today’s business environment:
There are various techniques which have been introduced as a part of advancement
management accounted that helps the organisation to set its financial as well as non-financial
targets and measure their performance against such targets. Balance scorecard is one of those
most prominent techniques that are being used by the managers of successful and highly
competitive business organisations so that their performance in the holistic manner. BSC
helps in identification; measurement and the display of non-financial performance measures
and takes into account financial perspective, client perspective, internal business perspective
and the internal growth i.e. the product innovation and learning perspective (Davis &
Albright, 2004). Under the framework of BSC, the financial indicators of performance are
supplemented by 3 types of performance evaluators in relation to client satisfaction, internal
business processes and the company’s ability to learn and grow. It has been argued by the
creators of balanced scorecard that the qualitative measures are better indicators of
company’s financial performance in future. This claim of Kalpan and Norton is asserted on
the basis of observation that quantitative measures only represent the effect of present
managerial actions on the company in a partial way. These indicators omit the impact of
actions taken by management in present (Gunasekaran, Patel & MihtcGaughey, 2004).
Problems with the performance evaluation system that takes into account non-financial
measures:

Management Accounting
The assessment of business performance on the basis of both financial as well non-financial
measures has its both advantages and disadvantages. It is a true fact that mere consideration
of quantitative aspects of the business does not help the business organisation in attaining
long term sustainability hence consideration of qualitative aspects has its own importance for
the success of business. However, assessment of qualitative performance of the business is a
complicated process as it involves considerable time as it requires additional time to explain
the employees of the company the significance of non-financial performance evaluation
system and also it requires accumulation of large amount of information. It is quite complex
to determine the benchmarks against which qualitative performance of business can be
measured (Cohen, Holder-Webb, Nath & Wood, 2012). Secondly, it is difficult to measure
the actual performance against the qualitative targets. Consideration of both financial as well
as non-financial measures makes the firm compromise with one of the measures as some of
the performance indicators or targets are expressed in time, units while others in financial
(quantitative) units or percentages. Consequently a wide range of non-financial targets could
lead to imprecise or erroneous measurement of the qualitative performance of the business
which in turn leads to incorrect decision making by the managers. Further, non-financial
targets also suffer from the limitation of statistical reliability because most of the non-
financial performance data is gathered through surveys under which there various
respondents but limited questions (Smith, 1995).
After examining the limitations of implementing the control system under which qualitative
aspects of the business performance must be given due consideration, it is important to
understand that the benefits of having the system of balanced scorecard or any other
technique through which non-financial performance of the business can be measured, are
greater than its limitations.
Conclusion:

Management Accounting
From the above study, it can now be concluded that financial targets such as sales, returns,
profits acts as the sole measures of the performance which at times fails to offer information
regarding the intangibles which also contributes to the success of the business. The method or
approach that the firm uses to measure its performance impacts the company culture. Balance
scorecard integrates the financial as well as non-financial targets and goals of the business so
as to allow the business organisations to create cohesiveness and achievement of common
goals by the different interest groups. The consideration of non-financial targets and
objectives of the organisation enhances the quality of communication, clarifies the true
intention of the company and also helps in making strategic use of both tangible as well as
non-tangible assets. An organisation that relies entirely on its financial performance and is
concerned only about achieving the quantitative aspects of the business can achieve success
in short run but in long run these financial targets will become meaningless if qualitative
aspect of business is not considered. From the above evaluation of importance of
consideration of non-financial performance of the business it is clear that inclusion of
qualitative factors while measuring the overall business performance of an organisation may
leads to certain complexities and it might consume more time to collect information in those
non-financial areas it is highly recommended to the business organisations to adopt the
system of balanced scorecard so that all the relevant areas of performance be it financial areas
or non-financial areas such as customer satisfaction, product innovation, company’s learning
or growth perspectives must be given equal importance which will ultimately help the
company to maintain an adequate balance of its overall business performance.

Management Accounting
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137-156.

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