Development of financial and non-financial performance models Essay

This essay is to analyse and measure the developments of new fiscal and non-financial public presentation measuring theoretical accounts from the 1990s to the present twenty-four hours, with analyses from different academic articles, giving instance surveies demoing the overall usage of fiscal and non-financial public presentation measuring systems.


Johnson & A ; Kaplan reference that the return on Investment step theoretical account is over accent on fiscal public presentation step. They criticise the over trust on short-run fiscal public presentation steps and suggest that the public presentation step systems should underscore towards long-run steps of public presentation alternatively of merely short term net income. Further, non fiscal public presentation indexs are every bit of import as fiscal steps. They can foreground assorted peculiar countries for company public presentation such as selling and quality control and fabrication etc. Besides they proposed that should increased accent on fiscal and non-financial steps.

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Tax return on investing is a popular fiscal step theoretical account developed in early twentieth century. It has been widely used for mensurating undertaking public presentation. The method is consecutive frontward and allows directors to mensurate how efficient they used the belongings of the company to do net incomes. However ROI is non perfect. There is still some bulk drawbacks which led to new public presentation step methods originate such as residuary income. Residual income is another public presentation theoretical account developed after ROI. I will compare them and analyse which theoretical account is better.

Tax return on investing, Residual Income Economic Value Added

Residual income ( RI ) equal the net runing income less the needed rate of return times cost of capital. The company ‘s end is to hold positive and increase residuary income. The higher the residuary income, the more value of the investing. Theoretically ROI is the same ; the higher the ROI the better. However it is non true in world. John ( 1970, p.127 ) has stated that ” each division is expected to gain an ROI aim, a division trough will non be probably to suggest a capital investing unless it is expected to gain a return at least every bit high as his aim ” . It means director will non do investings flush it is profitable because of the lower ROI. It will causes the company lose chance to maximize company net income. In contrast residuary income is more consecutive forward. In this instance the director who used residuary income theoretical account is likely to accept any investing which the cyberspace runing income is above the needed rate of return, in order to maximize the residuary income. The director who used residuary income will be given to do better determinations refering investing undertakings than director who used ROI. Another job which John ( 1970, p.125 ) mentioned that ”manager may increase his return on investing in the short tally by cut downing costs, by increasing gross revenues volume or monetary values, or by cut downing his investing base ” . Those thoughts can hike the ROI in short term but may harm company in long term. For illustration cutback the research and development support. It will do a future harm to the company such as hold or call off new merchandises enter the market which may makes the company go less competitory and damage the company net incomes in the hereafter. However residuary income is non perfect excessively, there is a major drawback which is can non be used to compare the public presentation of divisions of different sizes. Keith ( 1970, p.330 ) mentioned that ” unless the relationship between the cost of capital and division income is made explicit, as in residuary income, it is hard to compare two divisions ” . Assume a house had A and B divisions ; A had $ 1,000,000 norm operating plus, generate $ 120,000 cyberspace runing income and $ 20000 residuary income. B had 250,000 mean operating plus, generate $ 40000 cyberspace runing income and $ 15000 residuary income. Both of them have the same require rate of return @ 10 % . Division A ‘s public presentation had higher residuary income likely because of its size instead than the quality of direction. In contrast division B used merely a one-fourth of division A ‘s sum runing assets to bring forth somewhat lower residuary income. As an illustration, comparing divisions public presentation should non based on residuary income merely, should besides look at the operating assets it used and the operating income. In 1982, there is an improved version of residuary income is called economic value added. They are really similar but EVA is calculated based on net operating net income after revenue enhancement ( NOPAT ) . It is used to calculated the income after revenue enhancement and cost of capital. It chiefly relies on accepted ( GAAP ) accounting rules. Therefore, some accommodations are needed such as preparation costs for employee should be capitalized and amortized over the sensed period of future benefits, in order to forestall any possible deformations of income and investings. Compared to residuary income, it has the similar maps, benefits and restrictions that compared to ROI which explained above. But there are two major restrictions which ROI, RI and EVA have come across. The first job is they are over accent on short term measuring. Peter, Gyan and Clayton ( 1999, p.8 ) argued that ” EVA overemphasizes the demand to bring forth immediate consequences ” This job besides exist with ROI and residuary income, as Johnson and Kaplan mentioned the over accent on fiscal public presentation steps. The 2nd restriction is over trust on historical informations. Fletcher and Smith ( 2004, p.3 ) argue that ”EVA over trust on historical, fiscal steps such as net income border, plus bend over, cost of money and the degree of capital invested in the house. Recent research has shown that these fiscal oriented steps are non necessary declarative mood of future public presentation ” Although the article have non mentioned ROI and residuary income but they do have the same job which is mensurating public presentation based on historical informations. Johnson and Kaplan mentioned that fiscal steps need to be improved and travel off from short-run towards long term steps.

Balance scorecard and other non-financial public presentation step systems

Balance scorecard ( BSC ) is an strategic public presentation direction tool developed in early 1990s by Robert Kaplan and David Norton. It has been used to back up directors to hold a fast but comprehensive position of the concern. It allowed directors to pull off and measure the concern from four positions ; How do clients see us? ( clients perspective ) , what must we stand out at? ( internal concern position ) , Can we go on to better and make value? ( invention and larning position ) and How do we look to stockholders? ( fiscal position ) quotation mark from ( Kaplan and Norton 1992, p.172 ) The major benefit of balance scorecard is it take attentions fiscal and non-financial step which traditional fiscal step system do n’t cover. The client position is about the satisfaction of clients. The internal concern position is about what concern processes need to stand out at in order to fulfill clients and stockholders. Invention and larning position is about how company prolong the ability to alter and better in order to run into their vision. Financial position is about how should the company look to the stockholders in order to win financially. Compare to the traditional fiscal steps, balance scorecard provide long-run scheme in order to better long-run determination devising which traditional fiscal steps do n’t. It can increase the consistence between director ‘s behaviour and the company ‘s end that the directors who used ROI may merely concentrate on maximize ROI. Besides there are some possible benefits of utilizing balance scorecard ; Varma and Deshmukh ( 2009, p.14 ) stated that ” A good measuring system must mensurate parametric quantities impacting all its stakeholders. The BSC attempts to make this by mensurating public presentation across different positions: fiscal position affects stockholders, client position affects external clients, concern procedures affect stockholders and clients, invention and larning affects employees and may even impact clients. ” It allows director to cognize who will be affected in the certain position in order to put up suited ends for peculiar position. Besides they stated that ”Another benefits is it increase the staffs ‘ communicating and apprehension of the company ‘s scheme because the ends and steps are clearly stated ( Debusk and Crabtree, Does the Balance Scorecard better public presentation ) . However, balance scorecard have several restrictions should be considered ; Varma and Deshmukh ( 2009, p.14 ) mentioned ” It does non let benchmarking consequences against those of an industry group or rival ” . It is a major restriction that prevent comparing between houses and earnestly impact the flexibleness of the theoretical account for public presentation step.

Six Sigma is a concern direction scheme tool developed by Bill Smith in 1986. Six Sigma seeks to better the quality of fabricating procedure by placing and extinguish the defects ( mistakes ) . If the deflects per million chances is 3.4 which has achieved Six Sigma. Six Sigma chiefly is focus on clients satisfaction in order to increase gross. Second is to better the quality of procedure in order to cut down the hapless quality cost. There are three cardinal points are mentioned by English ; Identify your merchandise and service, Identify the clients for your merchandise or service and find what they consider of import, Identify your demands to supply the product/service so that it satisfies the client ( English 2004, p.1 ) .

Performance prism

The public presentation is direction model which provide construction in order to assist executives to measure the public presentation from 5 related positions ; 1.Stakeholder Satisfaction ( Who are our stakeholders and what do they desire and necessitate? ) , 2. Stakeholder Contribution ( What do we desire and necessitate from our stakeholders? ) , 3.Strategies ( What strategies do we necessitate to set in topographic point to fulfill these sets of wants and demands? ) , 4.Processes ( What processes do we necessitate to set in topographic point to fulfill these sets of wants and demands? ) , 5.Capabilities ( What capabilities – packages of people, patterns, engineering and substructure – do we necessitate to set in topographic point to let us to run our procedures more efficaciously and expeditiously? ) ( Neely, Adams and Kennerley 2002, p.4 ) Through the five perspective executives are available to build a concern public presentation theoretical account.

Comparing Balance scorecard, Six Sigma and Performance prism

Balance scorecard chiefly focus on clients and stockholders ‘ satisfaction in order to bring forth the ends to run into their satisfaction. However it does non include some correlative stakeholders such as concern spouses, rivals and providers etc. which Performance prism has covered. Six Sigma is chiefly focal point on clients satisfaction and quality betterment though in order to increase income and diminish the hapless quality cost though production procedures. However it ignores external concern environment as balance scorecard. It can be used with balance scorecard as a portion of the client position solution.

Cases for Balance Scorecard and EVA

Debusk and Crabtree stated an empirical grounds to demo that the companies implementing the BSC have improved their public presentation. By making this they conducted a study for more than 1,000 houses. They set out 4 inquiries to clear up ;

How widespread is the usage of the BSC? , What industries are utilizing the BSC? , Does following the BSC better a company ‘s operating public presentation and profitableness? , Do organisations frequently tie the BSC to compensation inducements? The consequences of the study shows many organisation have used balance scorecard which have improved their public presentation. 88 % of the organisation gained betterment in operating public presentation by utilizing balance scorecard and 66 % of them reported an addition in net incomes. However those who have failed to utilize balance scorecard may be because of the failure in communicating and trouble in interpreting the scheme. ( Debusk and Crabtree, 2006 )

Empirical consequences for the usage of EVA

Abdeen and Haight stated an empirical grounds to demo that the public presentation of the Fortune 500 companies utilizing EVA was better than the public presentation of the non-EVA users. However, the net incomes per portion and entire return is a batch worst. These consequences lead to reason that EVA will go less usage for step value creative activity to shareholders and that EVA will utilize the other traditional steps.


I am strongly agree with Johnson and Kaplan mentioned that the non-financial public presentation step is of import. It is because the non-financial step provide long term concerns in order to assist companies to do better determination and success in the hereafter. By making this company can follow the non-financial theoretical account ‘s model to put up ends and steps for the staffs to follow in order to follow the scheme. However non-financial steps are non perfect such as balance scorecard, it still has its restrictions. Although balance scorecard has been adopted by many houses but there is some restrictions which should be see such as ignore external concern environment. Merely focal point on clients and stockholders satisfaction but ignore external stakeholders such as spouses and providers etc. Assume that if the company has non meet its concern spouses or providers need, they may halt cooperate with the company and cooperate with others. As a consequence the company may non be able to run into the clients ‘ demand which lead to scheme failure. The users of any fiscal or non-financial should mind those concealed restrictions and happen a manner to avoid or work out the job instead than merely follow the theoretical account ‘s model. Besides good communications is of import such as clearly stated the end and how to accomplish the end in order to do the staff to follow the scheme systematically. Although non-financial public presentation steps is of import, but fiscal step should be ignored because they can supply fast and directly forward consequences of fiscal public presentation such as ROI can supply information about how efficient the division has used its belongings to bring forth net income etc. However blindly concentrate on maximise the net figure whether is ROI, RI or EVA may harm the company benefits in the hereafter and that ‘s why the non-financial public presentation is needed in order to work out the short term concerns job. As Johnson & A ; Kaplan mentioned that should emphasis on improved fiscal and non-financial steps, and it ne’er ends.

Overall all the fiscal or non-financial theoretical accounts are merely tools to assist company step and evaluate public presentation. They are all have different usage and restrictions so the users should take the most suited method and utilize it sagely in order to do betterment in the hereafter.


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