ACCA F2 Exam Guide| Non-Financial Performance Indicators
Introduction and Significance of Performance Measurement
Performance Measurement is a process that assesses’ how efficient is the organization or individual in accomplishing its goal or pre-set objectives. It evaluates the progress made and any areas of improvisation. It plays a very important role in occasions of strategic decision-making, Resource allocations, and accountability.
These indicators can be either financial or non-financial. When it comes to measuring the performance of any company the most discussed and focused measures are the financial measures, and the non-financial are the least concentrated on. Although there are many reasons as to why financial measures are not as major as the non-financial ones. The reasons include:
- Financial Statements can be manipulated or there can be errors in the accounts that affect the reliability of financial performance indicators.
- They are time-consuming and costly to prepare, as they need specialist accountants and up-to-date data for accuracy.
- They might be affected by external factors, e.g. inflation causes prices of goods & services to rise leading to rise in revenue but in reality, the business hasn’t improved its performance. They do not convey the whole picture.
- These are backward-looking. Financial Indicators only show a business’s past or current (short-term) performance, it has no direction or indication of the future or upcoming performance.
To avoid such mistakes, companies must use non-financial indicators to assess their performance to get a better sense of direction. Following are those non-financial indicators that companies or individuals can use.
The Non-Financial Indicators:
Human Resource Management
It tells how many and what type of people need to be recruited, and in what areas. What will be the skills required and if the needs of the organization are being met with the given skill set and experience?
It also includes the level and method of motivation of human resources, the right and fair rewards, and the appraisal system. All the required training is given and that too on a timely basis. The results of these appraisals and training are evaluated to check if the targets are met.
Some examples are:
- Staff Turnover
- Competence Surveys
- Absentee rates
- % of job applicants/offers accepted
There are to be different performance measurement methods on different levels of the product life cycle. For example in the early stages of the product life cycle, there has to be more focus on higher product awareness amongst the potential customers, and there has to be a customer satisfaction survey to ensure the product is catering to the right needs. They have to look out for any copycat products or potential competitors. They need to check for the number of defects in the products.
Then in the Growth stage, they need to keep a check that volumes are catered on a timely basis and have to keep a constant check on customer retention/ repeat orders.
Finally, at the maturity stage, there isn’t a lot of business growth so they’ll have to keep maintaining the market share and customer loyalty percentage.
Many different stakeholders have many different stakes in the business activity. For example, customers are interested in goods and services at a reasonable price and reasonable quality, employees/trade unions are interested in good working conditions and incentives, the government is interested in employment and taxes, pressure groups are interested in environmentally friendly activities, and many more. There has to be one performance measure for every stakeholder group which can affect and be affected by the business activities. Also according to the level of importance the stakeholders have.
It is used as a framework for identifying the external factors that affect business performance.
- Political: Government policy may impact an organization or even industry. The government uses policies like demand-side & supply-side policies and imposes different types of taxes and subsidiaries. It affects business performance in terms of productivity, expansion, etc. Sometimes political instability can cause business failure in the long run.
- Economical: Economic factors directly impact the organization’s performance through interest rates, employment rates, foreign exchange rates, etc.
- Social-Cultural: Changes in social attitudes impact the demand for goods & services, and hence creating either opportunities or threats for organizations. Factors include changing family demographics, education levels, cultural trends, and changes in lifestyles.
- Technological: It examines the rate of technology innovation & development that could affect an organization. Include changes in digital or mobile technology, automation, research & development. Innovating new processes such as robotics, 3D printing, or smart manufacturing, can improve the efficiency, quality, and flexibility of production and distribution.
- Environmental: This includes all the impact the business activity has on the natural environment it is surrounded by. All the ecological impacts an organization has can be measured such as; Carbon emission percentage, number of recycled items, % reduction in wastage, etc.
- Legal: It requires an organization to be aware of all regulatory standards and any changes in legislation within the territories they operate in, and how it impacts on business operations. For example employment laws, health & safety laws, trade regulations & restrictions, etc.
Customer Satisfaction survey
A common way to measure how satisfied customers are with a product, service, or organization. It helps the organization to understand what are the needs and preferences of their customers, and what are their expectations of the product. It guides organizations to focus on quality improvement so customer loyalty can be achieved. This indicator evaluates how well a business delivers value to its customers and keeps track of how they reacts to product changes and new strategies over time.
In benchmarking an organization compares itself with competitors or industry standards. Assists businesses where and how they can improve their performance. It’s a sort of self-learning process that a business carries out. There are 4 types of benchmarking:
- Internal: The Organization compares itself with others within the same industry, eg: Toyota’s HR department compares itself with Honda’s HR department or Suzuki’s HR department.
- Functional: The organization compares itself with others outside the industry, e.g.: Toyota’s Finance department compares itself to Samsung’s Finance department.
- Competitive: The organization compares itself with direct competitors, e.g.: Pepsi compares itself directly to Coca-Cola, instead of any other beverage company.
- Strategic: The organization compares itself with a direct competitor but for a strategic (bigger) change, e.g Samsung compares itself with iPhone to bring a bigger change, like Samsung wants to bring something better software than ios only for its own devices, not for all android phones.
This article explains and illustrates key performance indicators and critical success factors .ACCA F2 Exam guide
Limitations of Non-Financial Performance Indicators:
- Most of the time qualitative information can not be measured in numbers because of the nature of the information, for example customer or employee opinions.
- It can be very subjective as well, and sometimes biased especially in customer surveys.
- Sometimes non-financial performance measures are not even possible because the measure used does have a real world standard to assess if the performance measured is good or bad.
- The cost of collecting such information may be high and time consuming.
- Qualitative indicators are usually considerable instead of conclusive in decision making.
- The system through which these indicators are generated can be outdated and so result in being misleading.
It will be wise to say that neither financial nor non-financial performance indicators are individually sufficient enough. So in order for a complete performance evaluation companies should use a combination of financial and non-financial measures. There are some standard models which cover all perspectives of performance; financial and non-financial:
- Balance Scorecard: It includes 4 perspectives; financial success, Customer perspective, Growth and Process efficiency. In order for a business to perform well it must maintain a balance in all four.
- Building Block: It assesses performance in 6 dimensions; Financial, Flexibility, Competitiveness, Resource Utilization, Service Quality, and Innovation.
- VFM: It focuses on achievement of 3E’s; Economy, Efficiency and Effectiveness.
FAQs (Frequently Asked Questions)
Q1) Are these the only non-financial indicators? or are there more?
Ans) No, there can be many more indicators. Any measure which assesses how a company is performing.
Q2) Are the limitations more significant then the uses of NFPIs?
Ans) Both are equally important because they lead to decision making.
Q3) What can be an example of an environmental indicator used in the real world?
Ans) Carbon Emission rate is a mandatory information to be included in company’s annual report disclosures in many countries.
Q4) What is the difference between Political Factor and Legal Factor in PESTEL analysis?
Ans) There is certainty a difference, political factors are the policies and actions of the government that affect the business environment, such as trade agreements, tariffs, subsidies, etc. Whereas legal factors are the laws and rules that business must follow to operate legally, such as employment law, health & safety law, etc.
Written by: Mohammad Anas Khamisa Student at Mirchawala Hub of Accountancy