The Measurement of Performance within an Organisation - Article Example

There are Limitations, but Financial and Management Accounting Perform a Fundamental Role in the Measurement of Performance within an Organisation The practices of measuring performance are continuously changing and improving in the small or leading organisations. The organisations are facing fierce competition in the competitive global business environment and the performance is the major determinant of the survival, success or failure of a firm. Organisations employ various tools to measure the performance. It is possible only in an ideal world that organisations have unlimited resources and they are operating in a risk-free environment and they do not need any performance measurement tool. For any kind of decision related to an organisation or to measure any aspect of the performance of the organisation, managers need to get access to a total database of relevant events. Financial accounting tools have been used by the managers for many years to measure the performance within organisations however, with the changing nature of industries and global business environment; the implications of many of the tools of financial accounting have become limited. However, the combination of financial and management accounting tools overcome the limitations altogether and provide a significant way to organisations to measure their performance. In the decade of 1990s, in the advanced countries like United Kingdom and Scandinavia, public service sector came under pressure to become more efficient and effective in order to reduce their demands on tax payers and to maintain the volume and quality of services provided to public and to achieve this aim, the public service sector adopted a number of private sector management techniques (Brignall & Modell, 2000). The increased pressures to achieve transparency, accountability and value for money boosted the importance of measuring performance of public sector organisations and attracted the academic and management attention (Wisniewski & Stewart, 2004). Today, organisations have complex and well-defined performance measurement systems. There are various functions which are being fulfilled by the performance measurement systems in organisations such as control, formulation and communication of strategy for higher level managers and support and motivation for operational managers (Wouters, 2008). The design of the performance measurement systems differ greatly across organisations. Li and Tang (2009) studied the performance measurement system in a large Chinese state-owned enterprise and found that unavailability of key databases and political constraints act as barriers to change in the performance measurement designs of organisations. However, they have found the major role of financial and management accounting in the Chinese company. There are certain limitations of traditional management accounting techniques. One of the limitations is caused by the increasing implications of non-financial success factors in highly competitive industries for example service organisations are achieving huge benefits from performance measurement. Although much is known about the need of performance measurements in organisations however, little is known about the role of management accounting in non-financial performance measurement (Hussain & Gunasekaran, 2002). Some researchers have found significant contributions of financial and management accounting tools in some organisations and their limitations in other organisations. The interest of companies is increasing in performance measurement and they are trying to implement balance scorecard however, evidences suggest that many of the implementations of balance scorecard have not been successful (Bourne, Neely, Mills & Platts, 2003). On the other hand, findings of Lansiluoto & Jarvenpaa (2010) suggest that using balance scorecard for the purpose of environmental management is very effective. Since balance scorecard is a performance management system and technical change in the performance management system is easier to accommodate as compared to cultural influence of companies therefore, companies need to consider the company culture while using any performance management system. The findings of Lansiluoto & Jarvenpaa suggest that limitations of management accounting practices can be because of various factors such as culture of the company however, importance of the performance measurement systems in various other organisations cannot be denied. Therefore, although financial and management accounting have limitations still, they play a very significant role in the performance measurement within the organisations. Fryxell & Barton (1990, cited in Agle, Sonnenfeld & Srinivasan, 2006) argue that strategy, accounting and finance literatures highlight that both the accounting and market-based measures face measurement and controllability issues which reduce the implications of these measurements in organisational performance therefore, operationalising organisational performance becomes a challenge for the companies. Most of the research studies highlight the importance of management accounting systems in improving the managerial decisions in organisations. Alino conducted an experiment to determine whether the management accounting system information characteristics of scope influences the group processes and results in heterogeneous groups. These groups had high probability to indulge in conflicts. The findings of the research study suggests that information characteristics of management information systems has major impact on extenuating the wrong influences of faultline-induced conflict on the satisfaction and perceptions in the decision quality of the group. Otely (2001) argues that major focus of the new management accounting techniques is on the measurement and management of organisational performance. He argues that even the early management accounting techniques are very significant to measure the performance of organisations. For example, activity-based costing was introduced as the accurate method for product costing however, in addition to the better knowledge of product costs, activity-based accounting improved cost management and business performance. Management accounting has moved from measurement to management and initially its focus was on budgetary control and today much focus is on financial performance. Most of the companies are relying on management accounting techniques to measure the performance of organisations and they still lack the connection between measurement and management of performance. Broadbent & Laughlin (2009) argue that in the management, management control and management accounting literatures, more focus is given towards ex post performance measurement as compared to ex ante performance management. They highlight that accounting and the calculations made in accounting become a part of substantive rationality if and only if they fairly present the key values and concerns and recognised in the performance management system designs. A few years back, companies were heavily focusing on financial measurements to measure the performance of their organisations however, today; organisations adopt the measures which may also help them to manage the performance within organisations. Kaplan & Norton (2001) explains that organisations have acknowledged the limitations of only using financial measurements. For example, the previous systems of measurement used by the managers were ad hoc collections to keep a track of tasks whereas, the new measuring tools like balance scorecard connects the measurement to strategy. The changing nature of management accounting and incorporation of nonfinancial measurement tools advocate the flexibility of the field to the changing nature of competition and practices in organisations. The financial and management accounting methods and techniques are not magicians that could provide the firms with the accurate analysis. There are various assumptions and judgements made by the management in the organisation to measure and interpret the findings. For example, financial ratio analysis can help the organisations to measure the liquidity performance, stock performance etc however, what to include in the calculations of numerators and denominators of ratios and how to interpret the ratio requires huge judgement and assumptions. For example, cost-based accounting measures are used to measure the performance of the organisations indirectly because low cost allows the organisation to introduce competitive pricing and enhancing sales. Therefore, if cost-based accounting helps the managers to measure the costs then it does not directly contribute to the measurement of performance. The idea is that rather than debating on whether the financial and management accounting role is limited in the management of performance of organisations, one should admit that the subjects play a very significant role in measuring the performance of organisations. McLean (2009) studied the role of accounting techniques in the measurement and management of human performance in English farming. The study of McLean has highlighted that it is generally assumed that the accounting historians have paid very little attention towards the measurement and management of human performance in agriculture; however, in reality the story is different. McLean has given the example of Henry Best, a seventeenth century English farmer who used to maintain the financial records even in the absence of external accountability relationships. Henry Best had maintained the financial records not for fulfilling any legal reporting requirement but to employ financial accounting tools to keep a track of transactions and to analyse the performance of the workforce. In addition to the financial accounting tools, Henry Best had also developed the non-financial measurement systems and his developed methods in the seventeenth century are equivalent to modern control systems in nineteenth century. The example of Henry Best shows that even in the period when management accounting techniques were not formally introduced, the English farmers had employed these techniques for their own convenience. The most interesting aspect highlighted by this example is the use of financial accounting techniques in agriculture where the accounting historians find very limited record of financial accounting and reporting. Yazdifar & Tsamenyi (2005) conducted a research study to study the changes in the management accounting and changing role of management accountants. The research findings suggest that management accounting tasks in 1990s were primarily focused on business performance evaluation and cosy/financial control and the business performance evaluation is the potential area of focus in management accounting in future as well. Mohamed and Hussain (2005) conducted a research to study the role of management accounting in performance measurement practices in Oman. They argue that significance of the methods of management accounting in measuring the different aspects of performance in organisations is increasing. By analysing the data collected from four Omani service organisations, they have found that the models of performance measurements greatly differ in organisations and they are primarily based on the views and discretions of management, competition and economic and social constraint. However, financial and management accounting tools are being used in all organisations to measure the multidimensional performance. The recent changes in the management accounting techniques have been made to reduce the limitations of management accounting in nonfinancial performance measurement. The limitations have become more prominent with the increasing demand of human resource management systems. However, researchers believe that both these subjects should have their importance in their relevant fields. A human resource management system can never be a substitute of cost-based accounting management techniques. Have found that the role of financial and management accounting is not limited rather these are the organisations which have limited the role of these subjects. Hussain (2005) conducted a study to evaluate the role of management accounting performance measures in the financial services industry of Sweden. His findings suggest that the recent non-financial performance measurement trends in management accounting have negligible importance in Swedish banks and the financial service institutions are paying more attention towards measuring the financial performance by employing financial management tools. Therefore, the operational performance of these institutions has been affected because of their negligence towards nonfinancial performance measurement tools. In other words, these are organisations which may influence the role of financial and management accounting. Based on the above discussion, it can be analysed that a number of research studies highlight the importance of financial and management accounting role in organisations, however, a number of evidences suggest the limitations of accounting tools. However, like other fields, financial and management accounting do have limitations because they are influenced by the nature of use, purpose of use, culture, management judgements and assumptions. Regardless of the limitations, financial and management accounting have been supporting the organisations by measuring the performance. The other fields can never substitute the role of financial and management accounting however, they can support their role and reduce the limitations especially in nonfinancial performance measurement. Bibliography Alino, NU, ‘ Moderating Role of Management Accounting Systems on Group Diversity and Outcome Relationship’, viewed 2 March 2011, < http://www.wbiconpro.com/103-Nelson.pdf>. Agle, BR, Sonnenfeld, JA, & Srinivasan, D 2006, ‘Does CEO charisma matter? 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Yazdifar, H & Tsamenyi, M 2005, Management accounting change and the changing roles of management accountants: A comparative analysis between dependent and independent organisations, Journal of Accounting and Organisational Change, vol. 1, no.2, pp. 180-198. Read More