Kaplan and Norton (1992) wrote in their article that companies shall focus on balance scorecard that means focus on both non-financial and financial performance measures.
Any more answers from existing theories would be highly appreciated.
I would agree to a major extent that non financial measures are more important in the context of SMEs as well as new organizations. There are many reasons: financial measures are useful for comparison across peers and when the measures mean the same across organization. However for SMEs or start up organizations, the context is completely different and they are not in stable operating environment. So the validity of the measure becomes questionable. To that extent XBRL extended business reporting language is gaining ground.
SMEs and Startups have the identification of the entrepreneur and dominant measure is decided by entrepreneurial proclivity. Which subsequently becomes value measure of the organization. No doubt Financial parameters are necessary, but certainly not sufficient to measure the health of the organization.
In the extreme it would be illegal in many countries if the directors and managers did not pursue a shareholder profit (wealth) maximisation strategy. However, if strategies focusing on non-financial areas of the business deliver long-run profit then that would be consistent . Obviously many managers believe that good HR makes employees happier and more productive ( and hence profitable). I think the clear distinction is between operational or functional strategy and the overall strategic objectives of the owners (shareholders) and their appointed directors. Growth in share value and profit.
Tamkin et al People and the Bottom Line, Institute for Employment Studies, might be worth reading.
When you are referring to Kaplan's BSC, it is interesting that it measures 4 different perspectives for different purpose measuring. Somehow you are correct to the extent that the non-financial would lead to either direct or indirectly to financial performance. Particularly for SMEs, the immediate financial indicators are the most critical. Process and operational improvement could be linked to the quality management and efficiency concepts towards cost savings. Customer satisfaction perspective could be linked to the concept on the benefit of long term customer relationships. While the HR learning and growth is more closely been discussed in close relation to human capital perspectives.
The philosophy of a good company, I believe, is not only to provide a fair return on investment to the share holders, which is financial consideration, but also take care of the expectations of other stake holders through non financial measures like: providing good working condition, providing for career growth and development, recognizing creativity, encouraging meritocracy, value based management system, and consideration of social & environmental issues in strategic decision making. Through all these measures, the company will not only earn a good reputation, which is an intangible asset , but also will improve productivity, thereby creating competitive advantage.
Non-financial measures are important. As a practitioner in industry this has been my experience throughout. In fact some of the indicators that i call as 'crazy' indicators are important. For instance take profit per employee or turnover per employee, per se they may not mean anything; but look at them on a time series they will tell us stories. These two indicators link finance with non financial parameters like number of employees. Standalone non- financial indicators like number of employees may not mean much, but moment they are linked to financial parameters they really mean something for decision making. The indicator I have cited was used to compare entities with in the units and also branches. It was really useful!
Financial and non financial measures are very important for companies. There is a multiplicity of factors which play an important role in ensuring that the company excells and performs very well. Lets take for instance High-performance work systems (HPWS) which are a group of separate but interconnected human resource (HR) practices – e.g. selection, training, performance appraisal, and compensation – designed to enhance employee effectiveness. Employees should have better skills, more motivation, and more opportunities to excel when these high-performance HR practices are aligned and working in harmony. Resultantly, these non quantiafiable aspects are very essential in ensuring that employees perform on their jobs. When employees perform like that say for example in a sales oriented organisation chances are high that more customers will be brought in and hence, profits will be increased. Therefore, the financial and non finacial measures are very important,
iIt could be useful to find new ways to ensure good performance with respect to the quality of services provided. The best way is to integrate external engagement deeply into business decision making at every level of a company (MCKENSEY, 2013).Both in Italian context (CINQUINI, MIOLO, VITALI, 2000) and in foreign one (DEEM, 2004; MEISTER, SCHEYTT, 2005; NEUMAN, GUTHRIE, 2002) an intense debate has developed on the capacity of Costing and Managerial accounting System to introduce criteria of economic rationality in resources determination and allocation.
The conditions for implementing this change could be: a) Taking a strategic approach towards sustainability issues, distinguishing it from CSR traditional activities and philanthropy. b) Improving strategic management tools, integrating corporate governance (plans, budgets, project management, reporting, MBO) and sustainability management.
For example, we explored critical and economic-financial tools of communication and social reporting such as drivers of society development process in order to allow Small and Medium Size Italian Enterprises (SMEs) to become large and considerable in the national and international business system.
Article The Italian SMEs in the Global Context: The Accountability System Role
Non-financial indicators, like customer satisfaction rate, human resource turn over, new customer retention etc. can act as leading indicators because if you are doing good job at such areas most probably you will have good results at financial indicators, like profit, growth, sales etc. That is why they are called as leading indicators. Financial indicators are those we have at the end of day and so they are lagging ones. It is the case of any sized entreprises. There are many other models you can also find similar distinction, for instance EFQM Excellence Model, Performance Prism, Fİtzgerald's Determinants and Result Model.
I would agree to a major extent that non financial measures are more important in the context of SMEs as well as new organizations. There are many reasons: financial measures are useful for comparison across peers and when the measures mean the same across organization. However for SMEs or start up organizations, the context is completely different and they are not in stable operating environment. So the validity of the measure becomes questionable. To that extent XBRL extended business reporting language is gaining ground.
SMEs and Startups have the identification of the entrepreneur and dominant measure is decided by entrepreneurial proclivity. Which subsequently becomes value measure of the organization. No doubt Financial parameters are necessary, but certainly not sufficient to measure the health of the organization.
A tradeoff between non financial and financial performance need not exist.Type of non financial performances to be considered is industry specific. it may be social performance/ environmental performance...
The problem is that there are many in the financial performance indicators depending on the lens that arises. So it is not easy to tell someone. Recent literature proposes a system of economic indicators along with indicators of social assessing complex cases
Both the indicators are different and used in different situations .
All measures on the 4 BSC perspectives are equally important and that is in fact the main idea behind the concept of 'BALANCED'. However each of them need to be address separately, but somehow they are complementing each other towards the organizational performance.
The importance of the four perspectives in the Balanced Scorecard is different from an organization to another. This depends on many factor, such as management vision.
Very much agree with M.Judah. Other factor would be the company's strategic position (based on SWOT analysis). So what say you, Mr Zeeshan Hamid?
I think Zeeshan's question is a very important one. It asks whether everything we do in the three other (non-financial) indicators reflects a lead and not a lag indicator. Or, can we have lag indicators with in these three non-financial indicators? The question is not related to being important or less important. I would also like to know an answer to this question.
I am not familiar with the subject.But you may gain more insight by going through the following publications:
http://projeuni.ir/wp-content/uploads/2013/06/854653645.pdf
http://strathprints.strath.ac.uk/30689/1/Nudurupati_et_al.pdf
http://pages.stern.nyu.edu/~ealtman/Altman_Sabato_Wilson_final.pdf
I am strongly agreed with the answers of Prof. Luiz Henrique Pantaleão & Prof. Brajaballav Kar.
Thanks, Prof. Nageswara Rao Posinasetti- for good research articles.
The non financial indicators are more important in measuring the performance of finance, for the finance is only an instrument to be applied to accomplish the desired results. The results in most circumstances are non-financial like increase in productivity, improved standard of living, increase in employment, increase in assets etc.
It is necessary to include non financial parameters ( Market share, Customer satisfaction) , over focus on these may affect firm's P&L. As far as the Financial parameters are concerned ROI, Profitability can be included.
In Brazil it is very common SME having an informal management. It is not the case of to be informal to not pay taxes, but it is a question of the kind of management.
So, we have to develop many undirected performance measure, depending the activity of the SME. For example, if we are studying a restaurant, we can use the quantity of waiters, the quantity of tables; the quantity of meals/day. If we are studying an hotel we can use water bill, phone bill, electricity bill, gas bill.
Nowadays we are studying small building supply shops. We studying: number of commercial employees; commercial square area; quantity of items (number of items) to sell. I mean, we are trying to create some proxies to help us to evaluate SME performance. I hope these ideas can help you. Cheers, Hoffmann.
Non financial parameters to improve financial performance could also be customer satisfaction by providing value & quality , business process improvements by building up efficiency in operations and organizational development & learning, Which could be achieved through creation of favorable work culture, encouraging skill development , employee participation and fulfillment of stakeholders' expectations.
I have been using visual models to represent non-financial results and outcomes. These are like a very flexible version of Kaplan and Norton's strategy maps without the constraint of the Balanced Scorecard headings.
These models are built in a piece of 'lite' strategy discussion software - DoView - that I have been involved in developing. Here is an example of a DoView model for a software company. http://doview.com/visual/strategic-planning/software-company.html.
This approach to visual modeling allows you to model all of the variables that people have discussed above and most importantly use the visual model in strategy meetings.
The rules for drawing the models are at http://doview.com/plan/draw.html.
In regard to startup strategy analysis the approach can also be used to think about how viable a particular startup's strategy is.
http://doview.com/u/startup-competitive-analyze.html.
The theory is described in some detail at http://doview.com/outcomes-theory-simplified and the reference is below.
Conference Paper Using Outcomes Theory to Solve Important Conceptual and Prac...
I don't agree with Financial Performance as a only measure for performance. Recent literature also argue the same. Say Indian dotcom company FLIPKART is in loss but they are intentionally running on loss for other competitive advantage like scale, market share, customer satisfaction and growth. There is always a trade off between growth and profitability. So I argue in favor of profitable growth . If FLIPKART wants to show profit they can show it within 2 quarters but they are investing money back for growth. We can't call FLIPKART as a bad performing company just because they are making notional loss. We need to include control variables like Size, Age and Industry also, since some industry commands for growth in the life cycle, some sun rising industry may opt for scale rather than profit, a matured industry may opt for profit as there is no scope for further growth...these circumstances also needs to be investigated while measuring Performance.
Balance Score card is the consequences of this entire discussion.
Dear Zeeshan,
Looking at non-financial measures has become a fashion in the recent years, not only with regard to SME. Indeed, financial measures have limitations and often struggle to assess the company's performance and financial position appropriately. However, in the context of SME I would argue that financial measures are still important and relevant. Due to the relatively low scale of operations and de to relatively simple accounting and basic needs of SME financial measures may be fundamental and sufficient for the evaluation of performance and financial position. For example, SME usually rely on debt finance from banks, which are focussing on financial data.
Paul
Non-financial indicators if they are at variance with financial figures appearing in financial statements of the enterprise need proper scrutiny. To illustrate this point, if production in quantitative terms shows downward trend, power consumption in manufacturing facility in Unit terms need to show declining trend assuming no change in operating efficiency. Quantitative measures if in built in Management Information System Reports with financial analysis will help enterprise to focus on key areas of deviation for control purpose.
Hi Folks,
How do I measure performance on software startups? Has anyone measured or seen any study addressing this issue?
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