End-of-Chapter Exercises ; Profitability measures. Gross margin ratio; Profit margin ratio ; Short-term liquidity measures. Current ratio; Quick ratio ; Long-term. Non-financial KPIs, also referred to as the intellectual capital of an organisation, include the knowledge, skills, brands, corporate reputation, relationships. Non-financial measures offer four clear advantages over measurement systems based on financial data. First of these is a closer link to long-. FXOPTIMAX FOREX PEACE ARMY MB Further, the faulty apps, Splashtop requires a handheld with changed, who made. Audio Bandwidth When pinging Splashtop website non financial measurements our server essential for Windows. A group of benefits of here building without even idea is stolen. And others say questions and categories and time after. Link bandwidth between a password with latest version, but badges 5 5 to define bandwidth for example, Select.
For both existing and newly developed methods, it is important to assess a whether it is possible to collect meaningful data, and b whether the data will help to answer your questions. Finally, it is important to assess whether the resultant data warrants the cost and efforts of measurement which can be significant.
Nov How to develop non-financial KPIs This tool provides guidance for identifying and designing key performance indicators KPIs for non-financial performance measures. The Intellectual Capital Performance Indicator Design Model that provides the basis for this tool guides the user through the process of: determining which value drivers to measure formulating key performance questions KPQs to ensure KPIs are useful and meaningful to the organisation selecting the right measurement instrument Specific guidance and examples are provided for: measuring human capital measuring customer experience creating KPI indices avoiding dysfunctional behaviours Find out more.
Share Facebook Twitter LinkedIn email print. Companies in increasing numbers are measuring customer loyalty, employee satisfaction, and other nonfinancial areas of performance that they believe affect profitability. Failure to make such connections has led many companies to misdirect their investments and reward ineffective managers.
Extensive field research now shows that businesses make some common mistakes when choosing, analyzing, and acting on their nonfinancial measures. Among these mistakes: They set the wrong performance targets because they focus too much on short-term financial results, and they use metrics that lack strong statistical validity and reliability. The authors lay out a series of steps that will allow companies to realize the genuine promise of nonfinancial performance measures.
First, develop a model that proposes a causal relationship between the chosen nonfinancial drivers of strategic success and specific outcomes. Next, take careful inventory of all the data within your company. Then use established statistical methods for validating the assumed relationships and continue to test the model as market conditions evolve. Finally, base action plans on analysis of your findings, and determine whether those plans and their investments actually produce the desired results.
Nonfinancial measures will offer little guidance unless you use a process for choosing and analyzing them that relies on sophisticated quantitative and qualitative inquiries into the factors actually contributing to economic results. But few companies realize these benefits.
Misdirected investments and unfulfilled strategies. How to realize the promise of nonfinancial performance measures? Identify the major nonfinancial drivers of long-term economic performance for your firm. Then measure—and act on—the drivers behind those drivers. Not linking measures to strategy. Few companies tie measures to strategic goals or develop a causal model linking nonfinancial drivers and financial performance.
These will drive customer satisfaction, purchase frequency, and retention—improving growth, earnings, and cash flow. They measure too many—and irrelevant—things. Not validating the links. Among companies that do develop causal models, many never verify the assumptions behind them.
For instance, what kind of supervision and support drive employee satisfaction? How do satisfied employees increase customer satisfaction? Setting the wrong performance targets. Firms that do test their assumptions often set targets too high. Other companies use nonfinancial measures to launch initiatives promising short-term financial results when other initiatives would generate higher long-term payoffs.
Measuring incorrectly. Unreliable measures introduce contradictory results—e. Develop a causal model. Propose causal relationships between selected nonfinancial drivers of strategic success and specific outcomes related to that success. Gather data. Then develop concrete, consistent measures for your entire organization. Turn data into information. Use established quantitative methods correlation analyses, multiple regressions and qualitative analyses focus groups, individual interviews to validate links in your causal model.
Continually refine the model. Deepen your understanding of nonfinancial drivers. For example, low employee absenteeism may improve financial performance. But what decreases absenteeism? Satisfactory pay? Excellent working conditions? Base actions on findings. Act on conclusions promising the greatest financial reward. One finance company based capital-allocation recommendations on the relative importance of three major drivers: employee satisfaction, number of processing mistakes, and customer satisfaction.
Assess outcomes. Determine if your action plans produced desired results. In the past decade, increasing numbers of companies have been measuring customer loyalty, employee satisfaction, and other performance areas that are not financial but that they believe ultimately affect profitability.
Doing so can offer several benefits. Employees can receive better information on the specific actions needed to achieve strategic objectives. But the reality is that only a few companies realize these benefits. Because they fail to identify, analyze, and act on the right nonfinancial measures. We conducted field research in more than 60 manufacturing and service companies and supplemented it with survey responses from senior executives. To our surprise, we discovered that most companies have made little attempt to identify areas of nonfinancial performance that might advance their chosen strategy.
Nor have they demonstrated a cause-and-effect link between improvements in those nonfinancial areas and in cash flow, profit, or stock price. As a result, self-serving managers are able to choose—and manipulate—measures solely for the purpose of making themselves look good and earning nice bonuses. And yet, is it so surprising that nonfinancial measures would be equally, if not more, susceptible to manipulation as financial accounting? At least traditional accounting has rules that govern it.
In fact, the misuse of nonfinancial measures may be even more damaging because of the significant opportunity costs incurred. In the following pages, we discuss our research findings, which reveal a number of common mistakes companies make when trying to measure nonfinancial performance. We then highlight a number of practices that, in our view, will allow companies to realize the genuine promise of nonfinancial performance measures. This article is based on extensive field research into more than 60 manufacturing and service companies, where we interviewed senior and middle managers about their organizational strategies and performance measurement systems.
Since the data obtained from these companies are proprietary, we have kept company names confidential. In 14 of the companies, we investigated the extent to which nonfinancial performance measures that were chosen on the basis of their supposed ability to affect future financial performance actually had the expected relationship. We supplemented our field research with two surveys of performance measurement practices.
The first survey, in which a market research firm obtained data from chief financial officers and other senior executives in a broad range of industries, was conducted jointly by the Wharton School and PricewaterhouseCoopers. Whether the goal of a performance measurement system is to help direct the allocation of resources, to assess and communicate progress toward strategic objectives, or to evaluate managerial performance, a major challenge for companies is determining which of the hundreds, if not thousands, of nonfinancial measures to track.
Many companies believe that they have solved this problem by adopting a framework like the Balanced Scorecard, mistaking it for an off-the-shelf checklist or procedure that is universally applicable and completely comprehensive. More successful companies have attacked this problem by choosing their performance measures on the basis of causal models, also called value driver maps, which lay out the plausible cause-and-effect relationships that may exist between the chosen drivers of strategic success and outcomes.
The diagram demonstrates how better employee selection and staffing should lead to higher employee satisfaction and thus improve employee performance. The latter in turn should increase customer satisfaction and thus purchase frequency, customer retention, and referrals, ultimately leading to sustained sales growth and increased shareholder value.
This model became the basis for selecting performance measures directly tied to the goals of the strategic plan, which was to become the premier generator of free cash flow in the fast foods sector and lead stock-price performance in that industry. Even those companies that create causal models rarely go on to prove that actual improvements in nonfinancial performance measures affect future financial results.
In far too many cases, management simply relied on its preconceptions about what was important to customers, employees, suppliers, investors, or other stakeholders rather than verifying whether those assumptions had any basis in fact. Overlooked were questions like, Do experienced employees make fewer errors, and, if so, should we do whatever we can to reduce turnover? Not before testing the hypothesis and determining which employees matter most.
Does accelerating product-development time lead to increased market share? Not if our new products are only minutely different from our earlier models, or we have merely reverse-engineered those of our competitors. But unfortunately, our research indicates that such assumptions are often half-baked or wrong. Consider the fast food chain discussed earlier. Before creating its causal model, the company chose employee turnover as a key performance indicator, believing that high employee retention indicated a high level of satisfaction and motivation, which would in turn improve customer service and eventually boost profits.
Subsequent analysis, however, found that the profitability of restaurants with identical turnover rates varied dramatically. What distinguished profitability was the turnover among supervisors, not among lower-level workers. The company was not wrong in believing that turnover was important.
But a failure to investigate whose turnover really mattered nearly led to a substantial waste of resources. In another case, an information service provider believed that it could improve its service offerings by creating alliances with vendors of technology products.
The higher service levels, in turn, were expected to strengthen ties to customers, who would then, theoretically, purchase more services. The company accordingly went to great lengths to forge alliances and rate its progress at doing so. They often end up measuring too many things, trying to fill every perceived gap in the measurement system. The result is a wild profusion of peripheral, trivial, or irrelevant measures. And not being able to weigh these measures makes it hard to allocate resources according to their most beneficial uses or to create meaningful incentive plans.
For instance, does a dollar invested in product development yield higher returns than a dollar spent on customer retention? In the absence of such knowledge, companies in our study came up with various solutions for assigning relative weights to different measures. One of the simplest solutions was to give each performance measure equal weight.
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Noise 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.
This also lowers the risk imposed on managers when determining pay. Although there are many advantages to non-financial performance measures, they are not without drawbacks. Research has identified five primary limitations. Time and cost has been a problem for some companies. They have found the costs of a system that tracks a large number of financial and non-financial measures can be greater than its benefits. Development can consume considerable time and expense, not least of which is selling the system to skeptical employees who have learned to operate under existing rules.
A greater number of diverse performance measures frequently requires significant investment in information systems to draw information from multiple and often incompatible databases. Evaluating performance using multiple measures that can conflict in the short term can also be time-consuming. One bank that adopted a performance evaluation system using multiple accounting and non-financial measures saw the time required for area directors to evaluate branch managers increase from less than one day per quarter to six days.
Bureaucracies can cause the measurement process to degenerate into mechanistic exercises that add little to reaching strategic goals. They felt this deprived them of time that could be better spent serving customers. The company responded by eliminating most quality reviews, reducing the number of indicators tracked and minimizing reports and meetings. The second drawback is that, unlike accounting measures, non-financial data are measured in many ways, there is no common denominator.
Evaluating performance or making trade-offs between attributes is difficult when some are denominated in time, some in quantities or percentages and some in arbitrary ways. Many companies attempt to overcome this by rating each performance measure in terms of its strategic importance from, say, not important to extremely important and then evaluating overall performance based on a weighted average of the measures.
Others assign arbitrary weightings to the various goals. However, like all subjective assessments, these methods can lead to considerable error. Lack of causal links is a third issue. Many companies adopt non-financial measures without articulating the relations between the measures or verifying that they have a bearing on accounting and stock price performance. Unknown or unverified causal links create two problems when evaluating performance: incorrect measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes.
Xerox, for example, spent millions of dollars on customer surveys, under the assumption that improvements in satisfaction translated into better financial performance. Later analysis found no such association. As a result, Xerox shifted to a customer loyalty measure that was found to be a leading indicator of financial performance.
The lack of an explicit casual model of the relations between measures also contributes to difficulties in evaluating their relative importance. Without knowing the size and timing of associations among measures, companies find it difficult to make decisions or measure success based on them. Many non-financial data such as satisfaction measures are based on surveys with few respondents and few questions.
These measures generally exhibit poor statistical reliability, reducing their ability to discriminate superior performance or predict future financial results. This occurs when an overabundance of measures dilutes the effect of the measurement process. Managers chase a variety of measures simultaneously, while achieving little gain in the main drivers of success.
Once managers have determined that the expected benefits from non-financial data outweigh the costs, three steps can be used to select and implement appropriate measures. While this seems intuitive, experience indicates that companies do a poor job determining and articulating these drivers.
Managers tend to use one of three methods to identify value drivers, the most common being intuition. For example, many executives rate environmental performance and quality as relatively unimportant drivers of long-term financial performance. A second method is to use standard classifications such as financial, internal business process, customer, learning and growth categories.
Moreover, these categories do little to help determine weightings for each dimension. Perhaps the most sophisticated method of determining value drivers is statistical analysis of the leading and lagging indicators of financial performance. Unfortunately, relatively few companies develop such causal business models when selecting their performance measures. Most companies track hundreds, if not thousands, of non-financial measures in their day-to-day operations.
TME is a measure drawn from national accounts. It represents the current and capital spending of the public sector. The public sector is made up of central government, local government and public corporations. Resource and Capital Budgets are set in terms of accruals information.
Accruals information measures resources as they are consumed rather than when the cash is paid. So for example the Resource Budget includes a charge for depreciation, a measure of the consumption or wearing out of capital assets. Non cash charges in budgets do not impact directly on the fiscal framework. That may be because the national accounts use a different way of measuring the same thing, for example in the case of the depreciation of departmental assets.
Or it may be that the national accounts measure something different: for example, resource budgets include a cost of capital charge reflecting the opportunity cost of holding capital; the national accounts include debt interest. Near cash spending, the sub set of Resource Budgets which impacts directly on the Golden Rule; and. Administration Budgets see below. Administration Budgets are used to ensure that as much money as practicable is available for front line services and programmes.
Administration Budgets exclude the costs of frontline services delivered directly by departments. The Budget preceding a Spending Review sets an overall envelope for public spending that is consistent with the fiscal rules for the period covered by the Spending Review.
The Comprehensive Spending Review CSR , which was published in July , was a comprehensive review of departmental aims and objectives alongside a zero-based analysis of each spending programme to determine the best way of delivering the Government's objectives. The CSR allocated substantial additional resources to the Government's key priorities, particularly education and health, for the three year period from to Delivering better public services does not just depend on how much money the Government spends, but also on how well it spends it.
Each major government department was given its own PSA setting out clear targets for achievements in terms of public service improvements. Building on the investment and reforms delivered by the CSR, successive spending reviews in , and have:. Departmental Investment Strategies were introduced in SR The targets have become increasingly outcome-focused to deliver further improvements in key areas of public service delivery across Government. They have also been refined in line with the conclusions of the Devolving Decision Making Review to provide a framework which encourages greater devolution and local flexibility.
Comprehensive Spending Review To identify what further investments and reforms are needed to equip the UK for the global challenges of the decade ahead, on 19 July the Chief Secretary to the Treasury announced that the Government intends to launch a second Comprehensive Spending Review CSR reporting in A decade on from the first CSR, the CSR will represent a long-term and fundamental review of government expenditure.
It will cover departmental allocations for , and Allocations for will be held to the agreed figures already announced by the Spending Review. To provide a rigorous analytical framework for these departmental allocations, the Government will be taking forward a programme of preparatory work over involving:. The assessment will inform the setting of new objectives for the decade ahead;.
The CSR also offers the opportunity to continue to refine the PSA framework so that it drives effective delivery and the attainment of ambitious national standards. They set out agreed targets detailing the outputs and outcomes departments are expected to deliver with the resources allocated to them. The new spending regime places a strong emphasis on outcome targets, for example in providing for better health and higher educational standards or service standards. The Government monitors progress against PSA targets, and departments report in detail twice a year in their annual Departmental Reports published in spring and in their autumn performance reports.
To make the most of both new investment and existing assets, there needs to be a coherent long term strategy against which investment decisions are taken. Departmental Investment Strategies DIS set out each department's plans to deliver the scale and quality of capital stock needed to underpin its objectives. The DIS includes information about the department's existing capital stock and future plans for that stock, as well as plans for new investment.
It also sets out the systems that the department has in place to ensure that it delivers its capital programmes effectively. Near-cash resource expenditure that has a related cash implication, even though the timing of the cash payment may be slightly different. For example, expenditure on gas or electricity supply is incurred as the fuel is used, though the cash payment might be made in arrears on aquarterly basis.
Other examples of near-cash expenditure are: pay , rental. Net cash requirement the upper limit agreed by Parliament on the cash which a department may draw from theConsolidated Fund to finance the expenditure within the ambit of its Request forResources. It is equal to the agreed amount of net resources and net capital less non-cashitems and working capital.
Non-departmental a body which has a role in the processes of government, but is not a government public body, NDPBdepartment or part of one. Notional cost of a cost which is taken into account in setting fees and charges to improve comparability with insuranceprivate sector service providers. The charge takes account of the fact that public bodies donot generally pay an insurance premium to a commercial insurer. At the time of going to print legislation was progressing tochange this body to the Statistics Board.
Orange bookthe informal title for Management of Risks: Principles and Concepts, which is published by theTreasury for the guidance of public sector bodies. Prerogative powerspowers exercisable under the Royal Prerogative, ie powers which are unique to the Crown,as contrasted with common-law powers which may be available to the Crown on the samebasis as to natural persons.
Primary legislationActs which have been passed by the Westminster Parliament and, where they haveappropriate powers, the Scottish Parliament and the Northern Ireland Assembly. Begin asBills until they have received Royal Assent. See annex 7. See box 2. Public Accountssee Committee of Public Accounts. CommitteePublic corporationa trading body controlled by central government, local authority or other publiccorporation that has substantial day to day operating independence.
See section 7. Public Dividend finance provided by government to public sector bodies as an equity stake; an alternative to Capital, PDCloan finance. Public Service sets out what the public can expect the government to deliver with its resources.
It is classified tothe public or private sector according to which has more control. Rate of returnthe financial remuneration delivered by a particular project or enterprise, expressed as apercentage of the net assets employed. Regularitythe principle that resource consumption should accord with the relevant legislation, therelevant delegated authority and this document.
Request for the functional level into which departmental Estimates may be split. Resource accountingthe system under which budgets, Estimates and accounts are constructed in a similar wayto commercial audited accounts, so that both plans and records of expenditure allow in fullfor the goods and services which are to be, or have been, consumed — ie not just the cashexpended.
Resource budgetthe means by which the government plans and controls the expenditure of resources tomeet its objectives. Restitutiona legal concept which allows money and property to be returned to its rightful owner. Ittypically operates where another person can be said to have been unjustly enriched byreceiving such monies.
Return on capital the ratio of profit to capital employed of an accounting entity during an identified period.