Financial measures - Essay Example

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This paper also provides examples of non-financial measures and discusses whether they could give a better a better picture of the firm and compare them to…
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RUNNING HEAD: Financial Measures Financial Measures vs. Non-Financial Measures of Introduction
This paper discusses the use of financial instruments in evaluating a firm and compares them to nonfinancial measures. This paper also provides examples of non-financial measures and discusses whether they could give a better a better picture of the firm and compare them to financial measures. This will also discuss some advantages and disadvantages of both financial and financial measures. The paper will assess which of the two is a better way to analyzing a firm. This paper in effect compares the effectiveness and reliability of using financial measures as opposed to nonfinancial measures.
Financial measures are the traditional ones for evaluating operating performance, benchmarking competitors, and comparing industry results. To determine whether a company is profitable, profitability ratios like return on equity, return on assets and net profit margin may be used. Other companies or competitors normally use the same ratios also so that comparison and benchmarking are possible among companies (Meigs, Meigs & Meigs, 1995). However, it does not mean that non-financial measures are not useful since normally they are the underlying explanations of the difference in performance measures. To illustrate in the case of two similar companies in the industry, it is possible that one has more revenues or higher profitability than the other does. What could explain the difference between the two companies may be in the more loyal and active sales force of one company over the other. Upon investigation, it can be found that personal objectives of the workforce or people of the more profitable company are tied with the corporate financial objectives. The human resource contribution, which is basically non-financial, is normally not emphasized in the financial statements but they could constitute the competitive advantage on one company over the other company. After knowing that a company has more loyal and hard working sales force, the same company could sustain profitability or further the advantage and that makes the non-financial measure very useful. Of course they are other non-financial measures such as better customer service, better attendance of employees in meeting, zero absences in important activities, timely submissions of reports by concerned employees or departments (Streetdirectory, 2010).
The advantage and disadvantage of each measure can be drawn from the example given. Financial measures are readily measurable and are closer to measuring attainment of measurable financial objectives. It is easier to assess performance of managers as well using those ratios. The disadvantage of financial ratios is that limiting the use of the same may not completely see the bigger picture since they just measure data in a more meaningful and readily verifiable information way like revenues, expenses, assets, liabilities and equity. Without the underlying explanations like the more loyal and responsive workforce, financial ratios become less meaningful. In the given example, it could amount to disregarding the human resource in organizations, which is one the best source of competitive advantage, and even the most important resource in the organization.
On the other hand, the advantage of non-financial measures is the reverse or opposite of those in the financial measures. Thus, they could give the underlying reasons or explanations why a company is more or less profitable and better or less superior than competitors. They complement the limitation of the financial measures. Their disadvantage is that they cannot stand apart from financial measures. In other words, one cannot talk of more loyal and responsive workforce if the results are not translated to better financial performance of the organization.
The uses of financial information and nonfinancial information are both important. They actually complement each other. An understanding of both could be produced a better analysis. As far as effectiveness however concerned, it can be asserted that the financial information should be given more weight since they should be there to bring out the non-financial measures as explanation for the variance. As to better reliability, the same may be given to financial measures since the same is verifiable across more companies easily. Since non-financial measures complement the financial, their effectiveness and reliability could not be underestimated for purposes of decision-making.
Streetdirectory (2010). Non Financial Measures - Making Them Meaningful. Retrieved 28 November 2010 from
Meigs, R,. Meigs, W., & Meigs, M. (1995). Financial Accounting. New York: McGraw-Hill Read More
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