Question Tag: Non-Financial Measures

i) Limitations of Financial Measures:

1. Historical Nature: Financial measures often reflect past performance and do not provide real-time insights into what is currently happening within the company. This limitation makes it challenging to use financial measures as a sole indicator of future performance or current operational effectiveness.
2. Subjective Judgments: Financial analysis can involve subjective judgments, where values or ratios might mean different things across different industries or even different companies within the same industry. The interpretation of these measures may vary, leading to potential bias or misinterpretation.
3. Narrow Focus: Financial measures typically focus only on the financial health of the organization and do not consider other critical aspects such as customer satisfaction, employee engagement, or innovation. This narrow focus may result in overlooking important factors that contribute to the overall success of the company.
4. Short-term Orientation: Financial measures can sometimes encourage short-term thinking, where management might focus on improving financial metrics at the expense of long-term strategic goals. This short-term orientation can be detrimental to the sustainable growth of the company.

(Total: 6 marks)

ii) Financial and Non-Financial Measures:

Financial Measures:

1. Return on Capital Employed (ROCE): ROCE measures the efficiency with which a company is using its capital to generate profits. It is calculated as a percentage of profit earned over the capital employed, providing insights into how well the company is utilizing its resources.
2. Net Present Value (NPV): NPV calculates the present value of cash flows generated by a project, considering the time value of money. A positive NPV indicates that the project is expected to generate more value than the cost of capital, making it a useful tool for investment decisions.
3. Profit Margins: Profit margins measure the amount of profit generated from sales, indicating the company’s ability to manage costs and generate revenue. Key ratios include gross profit margin, operating profit margin, and net profit margin.

Non-Financial Measures:

1. Customer Satisfaction: Measuring customer satisfaction can provide insights into the quality of products or services offered by the company. High levels of customer satisfaction can lead to repeat business, customer loyalty, and positive word-of-mouth, all of which contribute to long-term success.
2. Employee Turnover Rate: The employee turnover rate measures the rate at which employees leave the company. A high turnover rate may indicate underlying issues such as poor work conditions, low morale, or inadequate compensation, which can negatively impact the company’s performance.
3. Market Share: Market share measures the percentage of the total market that the company controls. A growing market share indicates that the company is performing well relative to its competitors and is successfully attracting and retaining customers