Question Tag: Performance Indicators

i) Impact of Manager Involvement:

The managers’ involvement with setting the quarterly financial target could mean that the target will be more accurate and realistic. This is because the managers will be close to the operations of the fitness clubs and will be able to use their specialist knowledge to advise on regional variations to targets. For example, a national assumption of an increase of 10% in average revenue per customer may not be appropriate for the fitness club at Papase and should not automatically be factored into target setting. This involvement of managers could result in more accurate forecast information that can be used by the finance team in devising the financial targets. However, it is possible that the input of the managers may result in unrealistic financial targets. The managers may attempt to influence the targets to attain a bonus more easily. The fitness club managers may also not have an overall picture of the fitness club market or Gyakie’s strategic outlook.

ii) Disadvantages of Using Financial Indicators Alone:

• Short-termism: Linking rewards to financial performance may tempt managers to make decisions that will improve short-term financial performance but may have a negative impact on long-term profitability. For example, a manager may decide to delay investment in order to boost the short-term profits of their division.
• Internal Focus: Financial performance measures tend to have an internal focus. In order to compete successfully, it is important that external factors (such as customer satisfaction and competitors’ actions) are also considered.
• Manipulation of Results: In order to achieve target financial performance (and hence their reward), managers may be tempted to manipulate results. For example, the recording of the costs incurred in the current year may be deferred to the next year’s accounts in order to improve current year performance.