Appraise two different ways organisations measure financial and non-financial performance, providing one example of each

Appraise two different ways organisations measure financial and non-financial performance, providing one example of each. (5co02 ac 3.1)

Organisations evaluate their performance using a combination of financial and non-financial metrics. While financial measures focus on economic aspects, non-financial measures provide insights beyond monetary values. Let’s explore these two dimensions.

Financial Performance Measurement

Financial performance measurement focuses on quantifiable areas that directly impact the short-term success of a business. One key financial performance measure is the gross profit margin, which is calculated by subtracting the cost of goods sold from the revenue and expressing the result as a percentage of the revenue. For example, if a company has revenue of $500,000 and a cost of goods sold of $300,000, the gross profit margin would be ($500,000 − $300,000)/$500,000 = 0.4 or 40%. This ratio obtains the insight into how efficient the company is in producing and selling its goods.

Non-Financial Performance Measurement

Non-financial performance measurement focuses on those intangible factors carrying an organisation toward long-term value, including customer satisfaction and loyalty, brand reputation, and employee engagement. An example of a non-financial performance measure can be customer loyalty, through the Net Promoter Score (NPS). NPS is derived from a single question and calculated using responses to that question: “How likely is it that you would recommend our company/product/service to a friend or colleague?” Then, the score is applied to measure customer loyalty and satisfaction.

Profit is the financial benefit that occurs when the amount of revenue is greater than the expenses. It is a top-line measure of financial performance, indicating the overall success of the organisation in generating revenue. For example, if a company has a total revenue of $1,000,000 and total expenses of $800,000, the profit would be equal to $200,000, showcasing the financial success of the organisation.

Non-financial performance is usually gauged through KPIs. KPIs are quantifiable measures, the major intention being to evaluate business success in the accomplishment of strategic or operational goals. Customer satisfaction can be taken as a KPI, data which can be accumulated by conducting surveys and feedback to check on satisfying customers’ needs and desires.

On the other hand, non-financial performance measures deal with intangible aspects such as customer satisfaction, interaction, among others, evidenced by the Net Promoter Score for customer loyalty. In this regard, the two measures become vital for affording an all-inclusive assessment of an organisation’s overall performance in the long run.