AC 3.1 Evaluate organisations’ financial and non-financial performance measurement methods.
In order to achieve success in business, proper performance management is required (Gifford, 2020). In order to ensure that employee performance is aligned with organisational goals, performance management attempts to monitor, maintain, and improve employee performance while also ensuring that it is improved. Organizations, on the other hand, can evaluate their own success in a variety of ways. Because it is a component of evidence-based people management techniques, performance monitoring is essential for decision-making.
Financial and non-financial measures can both be used to evaluate the performance of an organization’s operations. Indicators of financial performance include revenues, gross and net profits, cash flows, the rate of return on investment, and productivity, to name a few. Profitability ratios such as gross and net profit margins are used to determine a business’s profitability. Work in progress capital (WK) is a statistic that reflects the amount of readily available operating liquidity that is used to fund routine business operations. When a business creates money from its operations, it is measured by cash flow, which is a financial statistic in itself. A cash flow statement that includes an operating cash flow is commonly seen.
The following are examples of non-financial performance indicators: customer feedback, sector ratings, legal compliance, staff feedback, and other non-financial performance indicators. Because they have a direct impact on how long customers remain with a company, customer feedback and customer retention are key non-financial success measures. Client retention is just as crucial as customer attraction in terms of business success. When it comes to determining how many consumers are satisfied with a product or service, customer retention is critical, and feedback helps an organisation figure out how to improve. A company’s human capital can also be utilised to determine how well it is performing. Based on the results of the survey, an organisation can determine how well it is performing by comparing the number of talented employees it has to the number of unqualified employees it has.
The most important advantage of non-financial indicators is that they lead to stronger alignment with the long-term corporate strategy of the organisation. A large number of intangible assets are represented by non-monetary indicators, which provide sufficient information on the effectiveness of various operations (Ahrens and Chapman, 2007). Among the disadvantages of non-monetary solutions include the fact that they are time-consuming and costly to implement. In addition to being exact and easily monitorable, financial measures offer the advantage of being transparent. As a drawback, because they are primarily concerned with the short term, they are ineffective for long-term strategic planning.
