Advantages of evaluating financial performance over financially effective measurements

Financial Supervisory Authority

The idea of ​​all transactions is to realize the bottom line of maximum financial benefits. In order to align this, the companies have established funding methods. The idea is to make sure that what the resources do and how they work, they must show profit in the income statement. It is generally done in three different steps. They have been named as follows:

First, it involves selecting the objectives of the organization.

Secondly, and also the most important part, is to strengthen measurement of information with respect to performance.

Finally, necessary changes are made by managers to serve as remedies for weak links in the company's financial cards. In other words, the financial components of a measuring device are fundamentally well-fired. There are certain stages that a company puts for employees. Lack of being able to fulfill even a certain process can be harmful to the situation. So, this method of measurement of performance is also known to show certain insecurity for employees. Here it could not provide the most reliable results. Operational performance management is largely assessed by the financial factors of performance measurements. Specific methods of the same have been mentioned as follows:

Methods of measuring financial performance

Economic value added

This method is directly related to the economic profit of the institution, which is directly attributable to the balance sheet. This method, in other words, can be used to measure net operating income after tax. There are also certain changes in the calculation of economic value added so that the companies can make it more synchronized with the profit and loss account in the income statement. This method is generally used by companies with lower interest rates these days. The reason for this is that at the moment companies can afford to look at only the company's business from the budget. There is much more to be achieved.

Activity-Based Cost

The basic law of economics states that managers need to make the most of the resources available to them. In terms of keeping their statement, companies generally analyze the processes that are in the system and then classify them as special actions. After that, the companies follow separate costs for each operation. This can be done in the form of direct and indirect costs.

Reason for change from financial to non-financial factors

In other words, we can say that this is also a form of performance measurement based on financial factors. You can allocate the cost of each activity, but there are always restrictions on the use of those who are very expensive. Once again, this method would not apply for a long time. The reason is that this method creates barriers to long-term investments. One has to understand that investment for certain activities can lead to the improvement of certain others in the long run. This may be in terms of workforce as well as the equipment needed to perform operations. So, as improvements, you need to switch to better methods that are not financial. (Activity Based Costing) (ABC, 2010)

Non-financial measurements

These are among the most useful performance measurements in current business situations. We have seen the faults of the finances. The following methods tend to improve them to improve organizations:

Non-Financial Performance Means

Six-Sigma Approach

The best approach to measuring performance is the six sigma approach. Companies try to identify defects in any method that is part of the organization's activities. These corrections are then corrected by certain diagnostic analysis tools. The companies also have special people who are only responsible for the same. As the name suggests, this method makes the companies 99.99966% error conditions free. Since it has its long-term account too, it can be used over financial performance measureme nt technology.


This theory is about constantly helping organizations to achieve their goals. The idea is more appropriate these days because it defines constraints that are in the way of business. It is performed in a five-step process. This has been mentioned as follows:

* First, the identification of the constraints is made.

* Then, the companies decide how constraints are used.

* It makes the entire system consistent with the decision taken.

* Then a negative policy is used to increase the ability of organizations to cope with more constraints.

* Then the companies & # 39; See if the constraint has been removed because of this. If it does not, they will return to the ID.

Advantages of Financial Factors and Errors of Financial Factors

The biggest disadvantage of financial factors is that it does not consider the company's extensive opinion. The companies need to emphasize the greatest possible monetary benefits. If this is not achieved, managers would not recommend that certain activities should take place as part of their activities. There have been many companies in the past that have been lost to a great extent due to such disastrous circumstances. One can take IBM for example. The company could not cope with the fact that it did not deliver immediate profits. As a result, they sold their laptop computer and saw another company that has a lot of benefits.

The advantage of a financial part is that it makes time for training. We all know that training is one of the areas that spend a lot of money in the beginning. Immediately the profit associated with the same could not be as much as considering the amount of money put in doing it. But the non-financial side indicates a long time in connection with the training. This is generally not given attention to the financial perspective, which is considered short-term.

The non-financial factors build reputation for business. It helps the company to adopt plans such as cost analysis. These methods are very helpful in making companies costly in the market. The budget can never give a room for the same. Under a powerful environment today, it became the business of looking for such methods.


As most companies today have further strengthened and even increased their perspective, simply looking for monetary gains as part of the performance measurement criteria is not worth it. As an example, technology has been moving very fast these days. This is because; Organizations are investing a lot of money in research and development. If the companies follow an economically value-added approach or activity-based method, they would not worry about investing so much. In the short term, they can have a good flow of money with them, but as we have seen companies like Procter & Gamble in advance, success in the world is only possible with investment in technology.

So the method of evaluating financial performance is not viable in the current era. It is certainly better not to use financial aspects of performance measurement as we have seen. The reason is that they aim to develop the overall quality of the product. At this point in which the life cycle of the product depends on the efficiency of the companies in order to keep their products on the market, companies need to focus on customer satisfaction than anything else. This is possible to a greater extent in non-financial measurements.


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