Difference between financial performance measurement and non-financial performance measurement

Definitions:

Financial performance measurement:

Financial performance measurement is a measure of financial health of a company. These measures are used to determine that how well a company is using its available resources in order to generate sustainable revenues and operating income.

Non-financial performance measurement:

Non-financial performance measurement is a measure for establishment of non-financial indicators of a business. These measures focus on the long-term success and the qualitative aspects of a business.

Difference between financial performance measurement and non-financial performance measurement:

The main points of difference between financial performance measurement and non-financial performance measurement are given below:

1. Primary Focus:

Financial performance measurement usually concentrate attention on the short-term success factors of a business. The primary focus of these measures are the revenues, profits and cash flows of the company. Whereas, non-financial performance measurement indicates deficiencies in those areas of business that can affect the long-term strategic success of an organization. The main focus of these measures is the satisfaction of customers and their retention, brand development, employee motivation, the capacity of organization, market share etc.

2. Primary Addressee:

The primary addressee of the financial performance measures of a company are shareholders. Simultaneously, these measures are used by different other stakeholder groups including, creditors and debt holders, competitors, potential investors, tax authorities etc. The main addressee of the non-financial performance measurement of a business is the management of that company as the focus of these measurements is the indication of discrepancies within the internal systems of a business.

3. Reports:

The financial performance of the company is reflected in the financial statements. These financial statements are prepared and made public, where external stakeholders have access to them. Statement of financial position (balance sheet), statement of profit or loss (income statement) and statement of cash flows are some examples. The non-financial measures are important for the internal management of a company and therefore are generated internally. These reports can vary according to the individual needs of a business or company. Some standard reports or tools used for measuring non-financial performance indicators are balanced score card (financial, customer, internal processes, growth), building block model (dimensions, standards, rewards) etc.

4. Application:

Both financial and non-financial performance indicators can be applied to companies that have a primary goal to earn profits and increased revenues. Many organizations especially not-for-profit organizations do not have a primary goal to surge profits rather these organizations focus upon the efficiency and effectiveness of their services and operations. For example, hospitals, charities, state-run welfare institutes etc. Such organizations use non-financial performance measures to evaluate their performance because use of financial indicators becomes irrelevant for them.

5. Accuracy of information:

Financial performance indicators provide a limited scope regarding the long-term maximization of shareholder’s wealth. Additionally, these can be manipulated by the management of a company by applying creative accounting or window-dressing. However, non-financial performance indicators not only take into account all the aspects of a business that can nurture a well-grounded organizational strategy, these metrics have less chance of manipulation and fabrication if formulated, implemented and evaluated properly.

Conclusion:

Deciding suitable performance indicators for a company is a difficult task. Traditionally, managers and potential investors used to rely upon the financial performance metrics only. Recently trends have been shifting towards the importance and relevance of non-financial measures within businesses. The reason behind this is the realization that apart from the financial activities of an organization, it is the key performance indicators that ensure the long-term growth and development of a business. Additionally, the success of many businesses is dependent upon the intellectual property (intangible assets) rather than the tangible assets like inventory or machinery etc. Therefore, focus of companies has shifted towards supplementing customer interests, evolving brand name along with satisfying all other vital stakeholders.

Leave a Comment