Advantage of Non-Financial Measures

advantages Non- monetary measures offer four clear advantages over cadence systems based on fiscal data. First of these is a closer inter-group communication to long-term organizational strategies. Financial evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do non deal with progress relative to customer requirements or competitors, nor other non-financial objectives that whitethorn be substantial in achieving profit cogency, competitive strength and longer-term strategic goals.For example, current product development or expanding organizational capabilities may be important strategic goals, but may hinder short-term accounting performance. By supplementing accounting measures with non-financial data about strategic performance and implementation of strategic plans, companies gutter communicate objectives and provide incentives for private instructors to address long-term strategy.Second, critics of traditional measures advocate that drivers of success in many industries ar intangible assets such as intellectual capital and customer loyalty, rather than the hard assets allowed on to proportion sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data bottomland provide indirect, quantitative indicators of a firms intangible assets. One study examined the ability of non-financial indicators of intangible assets to explain differences in US companies stock market values.It open up that measures related to innovation, management capability, employee relations, quality and brand value explained a portentous proportion of a companys value, even allowing for accounting assets and liabilities. By excluding these intangible assets, financially oriented measurement can encourage managers to make poor, even harmful, decisions. We give notice Jeremy Siegel on the Market Rough Going for Now, but Stocks Still a Good Bet Re-examining Stock Options as a Way to c onciliate ExecutivesMeasures That Matter Aligning Performance Measures With Corporate Strategy Building Companies That reach the World a Better Place The Art and Science of measurement CEO Performance Third, non-financial measures can be better indicators of time to come financial performance. Even when the ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits from decisions made now. Consider, for example, investments in search and development or customer mirth programs.Under U. S. accounting rules, question and development expenditures and marketing costs must be charged for in the period they are incurred, so reducing profits. But successful question improves future profits if it can be brought to market. Similarly, investments in customer satisfaction can improve subsequent economic performance by change magnitude revenues and loyalty of existing customers, attracting new customers and reducing transaction costs.N on-financial data can provide the missing link between these beneficial activities and financial results by providing forward-looking information on accounting or stock performance. For example, meanwhile research results or customer indices may offer an indication of future cash flows that would not be captured otherwise. Finally, the choice of measures should be based on providing information about managerial actions and the level of noise in the measures. disagreement refers to changes in the performance measure that are beyond the control of the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware of how much success is due to their actions or they will not have the signals they need to maximize their effect on performance. Because many non-financial measures are less susceptible to external noise than accounting measures, their use may improve managers performance by providing more precise evaluation of their actions. This as well lowers the risk imposed on managers when determining pay.