Introduction§
Performance measurement involves developing indicators to assess progress towards predefined goals and reviewing performance against these indicators. It applies to entire organizations, specific departments, branches, or individuals, encompassing a wide range of financial and non-financial measures.
Financial Measures§
Financial metrics provide a quantitative basis to measure the efficiency and effectiveness of an organization’s use of resources. These include:
- Return on Capital Employed (ROCE): This gauges the returns that capital investments generate relative to the debts and equity used to finance them. High ROCE values typically suggest efficient management of capital.
- Residual Income: This measure represents the income generated above and beyond the minimum rate of return expected by investors. It highlights what is truly leftover after satisfying capital costs.
- Economic Value Added (EVA): All about the value creation above the required return of the company’s shareholders. It’s the net profit after taxes minus the capital costs.
Non-Financial Measures§
Not all performance can be quantified in monetary terms. Non-financial metrics often reflect the operational and behavioral aspects of an organization:
- Delivery Time: A critical performance indicator in supply chain and logistics focused organizations, shorter delivery times can enhance customer satisfaction.
- Customer Retention: A key indicator of company health and service quality. Higher retention rates often point to a happy customer base.
- Employee Absenteeism: Frequent absenteeism can indicate deeper issues like poor job satisfaction or workplace culture problems.
- Staff Turnover: High turnover can imply dissatisfaction and potential disruptions in workflow and knowledge continuity.
Behavioral Aspects§
Management accountants must recognize how these measures influence manager behavior. For instance, prioritizing ROCE might curb investment to artificially boost short-term profitability, potentially harming long-term growth. Additionally, improving delivery times might meet targets but significantly escalate costs, undermining overall performance.
Linking Measures: The Balanced Scorecard§
The balanced scorecard revolutionizes performance measurement by integrating non-financial and financial metrics within the framework of the company’s strategy. This model ensures that short-term achievements align with long-term strategic goals, promoting sustainable growth.
Conclusion§
Understanding and implementing effective performance measurement strategies is crucial for aligning operations with strategic objectives, enhancing efficiency, and fostering organizational success. Beware of potential pitfalls where metrics drive undesired behaviors, and strive for a balanced approach integrating both financial and non-financial aspects.
Related Terms§
- ROI (Return on Investment): Measure of profitability ratio regarding a specific investment.
- KPIs (Key Performance Indicators): Metrics that help an organization achieve organizational goals.
- Corporate Strategy: The overall scope and direction of a corporation and the way in which its various business operations work together.
Suggested Books§
- “The Balanced Scorecard: Translating Strategy into Action” by Robert S. Kaplan and David P. Norton
- “Key Performance Indicators (KPI): The 75 measures every manager needs to know” by Bernard Marr
- “Performance Measurement and Control Systems for Implementing Strategy” by Robert Simons
Embark on your journey of performance measurement with wit, caution, and the right tools, and you might just measure up to your own expectations!
