Advantage of Non-Financial Measures

advantages Non- pecuniary measures offer four clear advantages over measurement systems base on financial information. First of these is a closer link to long organizational strategies. Financial military rank systems generally focus on annual or short-term cognitive operation against report yardsticks. They do non deal with progress relative to guest requirements or competitors, nor other non-financial objectives that may be important in achieving profit ability, competitive strength and longer-term strategic goals.For example, new 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 can communicate objectives and provide incentives for managers to address long-term strategy.Second, critics of traditional measures argue that drivers of success in ma ny industries are intangible assets such as intelligent capital and customer loyalty, rather than the hard assets allowed on to balance sheets. Although it is difficult to quantify intangible assets in financial terms, non-financial data can 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 found that measures related to innovation, management capability, employee relations, lineament and brand value explained a significant 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 Suggest Jeremy Siegel on the grocery store Rough Going for Now, but Stocks Still a Good Bet Re-examining Stock Options as a Way to Compensate ExecutivesMeasures That Matter Aligning Performance Measures With Corporate Strategy Building Companies That Leave the humankind a Better Place The Art and Science of Measuring CEO Performance Third, non-financial measures can be better indicators of early 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 research and development or customer satisfaction programs.Under U. S. accounting rules, research and development expenditures and marketing costs must be aerated for in the period they are incurred, so reducing pay. But successful research remedys future profits if it can be brought to market. Similarly, investments in customer satisfaction can improve subsequent economic performance by increasing revenues and loyalty of existing customers, attracting new customers and reducing transaction costs.Non-financial data can provide the missing link between thes e beneficial activities and financial results by providing forward-looking information on accounting or stock performance. For example, interim 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.Noise refers to changes in the performance measure that are beyond the ensure of the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware of how a lot 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 also lowers the risk imposed on managers when ascertain pay.