The non-financial performance indicators

Many business executives evaluate their business’ performance using financial reports only as the main source of information about the company’s performance. Evaluating performance using financial indicators only has some limitations. Financial indicators are lagging indicators. They measure the past. This traditional method for evaluating business performance based on financial indicators does not identify all factors influencing company performance.

This way of analysing company performance provides an incomplete evaluation of the performance of the business because some internal factors, mostly non-financial, which describe the company’s internal and future potential, are not taken into consideration.

In conditions of intense competition, economic development and environmental uncertainty, a company cannot rely only on evaluating performance using financial indicators in order to manage the company successfully. It has to use non-financial indicators as well. These indicators are non-monetary in nature. They can be quantitative or qualitative. Some of these indicators of business performance are not found in financial data.

For instance, such indicators as quality, customers’ satisfaction, product development, innovations, and market share all reveal the economic position of a company and opportunities for growth better than the financial indicators which are calculated from the financial reports. Therefore, in order to ensure long-term growth and the competitiveness of an entity, it is imperative that companies adopt performance measurement systems that evaluate businesses using non-financial performance indicators in addition to financial indicators.

Non-financial performance measures being leading indicators are better indicators for determining future financial performance than lagging financial indicators. NFI have more information content, which is very key in assessing performance, than financial indicators.

We have discussed the balanced scorecard indicators in the previous articles. The BSC is one of the performance management systems that use both financial and non-financial indicators. The BSC includes the financial perspective (how do our shareholders see us), customers’ perspective (how do our clients see us), internal processes perspective (where do we need to develop) and innovations and learning perspective (how can we improve and create value).

The last three perspectives, namely customers’ perspective, internal processes perspective and innovations and learning perspective use non-financial indicators (NFI). The NFI indicators were designed to trace and develop cause-effect links between long-term goals and short-term activities which the company has implemented. The business’ performance that can be deduced from the financial reports through use of financial indicators is a result of what the company is doing within the other three perspectives: customers, internal processes and innovations and learning.

These drive the performance of the company and determine the long term growth and survival of the business. Managers have now realised that the results of non-financial activity positively influence the results of financial activity and as a result an increasing number of company executives have transformed their performance evaluation systems to include tracking of non-financial indicators. After analysing the NFI companies can develop new strategies that will ensure that the company’s performance improves.
The growth and learning perspective of the balanced scorecard is the first of the perspectives that, if attended to, will ensure the success of the business.

The growth and learning perspective is divided into three groups: human capital, information capital and organisational capital.
Indicators included in this perspective address issues such as employees’ skills, staff development and training; workplace relations, employee satisfaction, motivation and employee health and safety, opportunities of the information system, innovation and product development. A company needs to address these issues to ensure its future growth is guaranteed.

The second aspect, the internal business processes, includes material and labour efficiency, process improvement and reengineering, new product introduction, and long-tern relations with suppliers. These process improvements will help in serving the customer better thereby aiding in acquiring and retaining customers.

The third perspective deals with customers and includes market share, customer satisfaction survey, on time delivery, customer response time and warranty repair costs. If a company addresses these issues it will be able to meet its financial targets because customers will be buying more and will stick with your company.

The above indicators will differ from industry to industry but they are an indication of what to include when analysing performance using NFI in the three perspectives; customers, internal business processes, and learning and growth.

The use of non-financial performance indicators has advantages and disadvantages. The main advantages of non-financial performance indicators are that they are closely linked to the company’s long-term strategies; they are better in indicating the future financial performance of a firm; and they are less susceptible to external influence.

However there are some disadvantages of using non-financial performance indicators. The measurement and assessment of non-financial performance indicators are complicated by the time and cost required to explain to employees the principles and advantages of using a non-financial performance system as well as calculation and introduction of non-financial indicators.

The other shortcoming is that it is complicated to measure and compare non-financial performance indicators if some indicators are expressed in time units, while others are in quantitative units or percentage. As a result, a variety of non-financial indicators measurement methods can lead to imprecise or even erroneous measurement of company’s non-financial performance.

The other disadvantage is that non-financial performance indicators lack statistical reliability because many non-financial data, for example, satisfaction indicators, are based on surveys having a certain number of respondents and quite few questions and these differ from survey to survey.

Notwithstanding these shortcomings companies that use both financial and non-financial indicators are able to track their performance and develop appropriate strategies to improve performance in the future.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com <mailto:sjakarasi@gmail.com> , call on +266 58881062 or WhatsApp +266 62110062.