Accounting Measures for Management Performance


With the current competitive pressures in the market, most companies considered updating of their performance measurement tools. To use the accounting information effectively, management departments need to extend the frames of the existing accounting practices and apply the innovative measures. Thus, using only the accounting measures is insufficient for developing an effective performance measurement strategy. The findings of the recent theoretical and empirical studies put an emphasis upon the non-accounting measures which also play an important role in the performance measurement due to the impact of the human resource capabilities upon the companies’ outcomes.

The balanced scorecard which comprises both accounting and non-accounting measures and considers the hierarchical links between the various informational units would be an effective solution for Combined Ltd, a company manufacturing the freezers and refrigerators and undergoing the organizational changes recently.

Key factors to be considered in design of the financial performance measures

Regardless of the fact that the importance of the performance measurement for effective management of organizations has been recognized for a rather long period of time, the approach to design of the financial performance measures for Combine Ltd remains a rather debated and complicated issue. The key factors which need to be considered in selecting and developing the financial performance measures include the allocation of costs and responsibilities to various departments, including cost centers, revenue centers, profit centers and investment centers.

In terms of the performance measurement, a cost center can be defined as a special department aimed at collecting, processing and evaluating the data on costs in their immediate context for evaluating the operational costs, for example. Processing the data collected by the cost centers, a company will be able to develop strategies for reducing these costs where it is possible. The revenue centers deal solely with the data on the company’s revenues and disregard the costs which can also arise from them. The profit centers collect the information on both revenues and costs for determining their profitability. As to the investment centers, they play an important role in the decision-making process because managers in these centers are responsible for making the investments decisions.

There is evidence that the performance measurement revolution has taken place within the recent decades. Kaplan and Norton (2001) noted that the measurement systems in about 60 percent of companies underwent serious changes between 1995 and 2000. However, notwithstanding the positive effects of these projects, most of them were static and little attention has been paid to the dynamics of these systems (Malina and Selto 2001).

For this reason, in design of financial performance measures for Combined Ltd after reorganization of the company into two divisions, proper consideration should be given to the changes in the organization’s circumstances and adaptation of the measurement systems to the dynamics of the market as well as the internal processes within the company. Thus, there is a growing need for the implementation of a more integrated and balanced strategy in performance measurement and management systems (PMMS) (Kennerley and Neely 2002).

The profit, sales and cash flow parameters are central to evaluating the financial performance of a particular firm. Traditionally, the three factors, namely the market and competitive environment along with evaluating the company’s capabilities, have been regarded as crucial for the strategy formulation and corresponding PMMS development. However, the findings of the recent empirical studies have demonstrated the importance of the so-called internal capabilities factor, comprising consideration of the financial and societal risks along with estimation of the supplier-partner capabilities (Evans 2008, p. 156).

Thus, all these six factors need to be taken into account for evaluating the possible effects of divisional reorganization, evaluating the outcomes and designing effective financial performance measures (Simons, Davila, & Kaplan 2000).

Though the data retrieved through the implementation of the financial performance measures is recognized as insufficient for developing the overall company’s strategy and the non-financial measures need to compliment it, this information provides valuable insight into the current situation in the organization. For example, a SWOT analysis which focuses on strengths, weaknesses, opportunities and the threats parameters of the company’s data can be applied for conducting the financial measurements. Certain deficiencies in the evaluation steps regarding the hierarchical structure of the factors under consideration are recognized as the main disadvantages of this approach (Yuksel & Dag deriven 2007).

Regardless of its inappropriateness for determining the importance of particular factors, the method of SWOT analysis can be implemented for processing the financial information of the organization. A resource-based approach as an effective alternative to the traditional pattern of the SWOT analysis was offered by Valentin (2001) who claimed that this updated approach can be helpful for overcoming the conceptual shortcomings of the SWOT analysis. Focusing on systemic causal relations between the major influential factors, the resource based approach can be valuable for not only analyzing the major determinants of profitability, but also viewing them in a broader context of the overall firm’s performance.

Another solution for filling the existing gaps in the method of SWOT analysis is complementation of the SWOT matrix with the balanced scorecard. Lee & On Ko (2000) noted that a more structural approach to analysis of the financial information through application of the balanced scorecard can be helpful for developing a holistic management system in general.

Though the financial measurements are important for evaluating the current situation in the organization, the information on the key financial parameters within the organization provides insight only into the short-term financial performance of the firm, underestimating the long-term consequences for the organization which should be measured through combination of the financial and non-financial measurements (Drury 2008).

The use of non-accounting measures for appraising short-term divisional management performance

The importance of the human resource capabilities as one of the central factors in the performance measurement need to be taken into consideration by the firm’s management in developing the organization’s strategy (Vijayakumar 2010). Thus, the implementation of non-accounting measures is crucial for appraising the divisional managers for their outstanding performance and motivating them for enhancing the effectiveness of the processes and improving the end outcomes.

Underestimation of the human factor and not establishing the links between the individual performance of divisional managers and the success of the financial strategies in general is recognized as one of the major causes for the failure of the financial initiatives. Miller and Israel (2002) noted that neglecting the relationship between the management individual performance and the corresponding financial measures can be regarded as one of the main reasons resulting in failure of the PMMS initiatives in business practice. For this reason, the non-accounting measures implemented for evaluating and appraising the performance of concrete divisional managers are critical for the formulation of an effective strategy at Combined Ltd.

The employees’ attitudes towards the organizational changes may have a significant impact upon the end outcomes of the PMMS initiatives in general. Tonchia (2000) admitted that the employees’ fears of losing their jobs and their negative perception of the evolutionary changes within the companies can become influential factors generating their resistance to the implementation of new strategies. In that regard, the non-accounting measures of evaluating, recognizing and rewarding the employees’ achievements need to be fulfilled for the purpose of improving the end outcome (Sundara 2004).

Apart from motivating the employees for improving their performance through developing a complex system of rewards and bonuses, the non-accounting measures can be helpful for detecting the main shortcomings in the managers’ performance and defining the gaps which need to be filled for improving the existing situation (Neely et al 2000). By the way, measurement of the non-financial parameters can be helpful for fostering the accountability factor within the company.

Recognizing the role of the human resources in general and the management performance in particular for the successful implementation of the firm’s strategy, it can be stated that special attention should be paid to the choice of the managerial style (Gediehn 2010). Thus, deciding between the budget-constrained, profit-conscious and non-accounting styles, managers need to take into account the positive and negative implications of choosing each of these approaches (Hopwood & Chapman 2009).

Thus, the proponents of the budget-constrained style give serious consideration to meeting the subordinates’ ability to meet the budget targets, neglecting the rest of the parameters which can affect the long-term performance of the company. The profit-conscious style presupposes a more flexible approach to the budget information management, taking into account the financial information but not overemphasizing it.

The non-accounting style underestimates the importance of the budget information for estimating the overall employee’s performance (Atrill & McLaney 2009, p. 241). The implementation of the budget-constrained strategy in most cases resulted in higher job-related stress in both divisional managers and their subordinates (Bowhill 2008). Another negative implication of this approach is the unethical and undesirable actions which are taken by managers for manipulating the figures and meeting the targets by all means. For this reason, the two latter managerial styles are preferable for creating the favorable working environment within the organization and improving the quality of performance and the end outcomes.

Acknowledging the importance of the human factor in implementing the company’s strategies, it can be stated that the non-accounting measures should be considered while developing the performance measurement strategies for Combined Ltd. Taking into account that the employees’ motivation can have a significant impact upon their professional performance, it can be stated that the non-accounting measures are important for not only creating favorable working environment and changing the employees’ attitudes towards the organizational changes, but also enhancing the end outcomes in general.

The non-accounting measures which could be used to monitor sales performance in the company

The current competitive pressures in the market place make organizations reengineer their organizational patterns and performance measurement systems for the purpose of adapting to the changing environment. Recently, the measurement systems in most organizations underwent evolutionary changes, combining the financial and non-financial measures for considering the various dimensions and developing more effective strategies (Gomes et al 2004).

Coming to realization that neglecting either financial or non-financial measures is irrelevant in the context of modern competitive pressures, the management of most organizations decided to combine these approaches. Toni and Tonchia (2001) noted that integration of cost and non-cost measures with other firm systems is much more effective than separating these two strategies. The non-cost measures including the quality, time and flexibility parameters need to be taken into consideration and incorporated into the overall measurement system, placing special emphasis upon the impact of the human resource capabilities.

Otley (2001) discussed the hazards associated with confusing the approaches and their roles which limit the opportunities for developing a competitive strategy and improving the end outcomes. Bushman, Chen, Engel & Smith (2004) noted that the choice of the management style has a significant impact upon the effectiveness of the performance management system.

The non-accounting measures which could be used for monitoring sales performance in the company include earnings per share, return on investment, operating margin and net profit margin. The earnings per share denoting the profit for each significant share of the company can be used for determining the company’s profitability. Return on investment (ROI) allows evaluating the average efficiency of investment by comparing the profitability of various investments.

The operating margin in its turn evaluates the company’s profits after taking out the operational costs which include the costs of the gods sold and the employees’ wages. Net profit margin can be used for comparing the performance of Combined Ltd with its competitors in the same industry and the same market sector.

The examples of the non-accounting measures which can be used for monitoring the sales performance within the organization include also the analysis of the number of loan applications in each department, the number of returned customers and the most popular models and brands sold by the manufacturer. Collecting this data, management would be able to get a broader insight into the level of performance in particular division managers.

The operation of the measurement system cannot be limited to a quantitative analysis only and should give serious consideration to the quality of the performance. Tayles, Pike & Sofian (2007) established a strong link between the intellectual capital within the organization and the accounting practices in the firm, demonstrating the importance of taking into account the human resources capabilities and balancing the financial and non-financial elements of the performance measurement system. The direct links between the variables of a competitive strategy and the proper performance measurement system were explored by Oubina, Rubio & Yague (2007).

The examples of possible implementation of the non-accounting strategies for measuring the sales performance of various divisions were offered by Peasnell, Pope, & Young (2005). Demonstrating the importance of the human factor for the overall firm’s performance, these scholars provide valuable information which can be used for improving the integrity of financial statements. Ambler, Kokkinaki, & Puntoni (2004) also gave serious consideration to non-accounting measures which can be implemented for evaluating marketing performance in modern companies. Drawing the parallels between the top management orientation, the brand equity and the competitive benchmarking of the firm, the scholars suggested non-accounting patterns which could be used for enhancing not only the performance measurement procedures, but also the economic-financial outcomes of their activity.

Cuganesan (2008) offered treating the parameter of customer intimacy as a non-accounting strategy for evaluating the sales calculation network for creating a complex sales calculation network. A similar approach has been adopted by Chenhall & Langfield-Smith (2007) who attempted to develop performance measures of greater relevance by implementing the non-accounting measures along with the accounting strategies.

The choice of the performance metrics for a particular organization would depend upon the peculiarities of the market environment and the internal processes within a particular organization. Regarding the case of Combined Ltd, the sample non-accounting measures which can be implemented for conducting a qualitative analysis include the evaluation of the number of loan applications from customers for buying refrigerators from different divisions and the models of refrigerators which are popular among customers and employees.

The non-accounting measures which could be used to monitor sales performance in the company

A balanced scorecard for Combined Ltd

A balanced scorecard is one of the most popular performance measurement tools which can be used by managers for compiling a semi-structured report and giving serious consideration to various sides and dimensions of the performance measurement processes as well as the hierarchical relations between the various metrics. Young (2007) noted that using a balanced scorecard is one of the most effective accounting solutions which can be taken by the company’s management.

Regarding the balanced scorecard for Combined Ltd, it should comprise the accounting and non-accounting measures and a separate strategy for each department. According to Lipe & Salterio (2000) the balanced scorecard should be developed for every organizational unit taking into account its specific needs and objectives. Norreklit (2000) noted that the balanced scorecard can be applied as not only a strategic measurement tool, but also a method for aligning the numerous dimensions of the company’s processes and combining the individual perspectives and targets of managers and their subordinates and the whole department in general.

Compared to the traditional performance measurement tools, the balanced scorecard has a number of significant advantages. Along with the integration of the financial and non-financial measures, this model allows linking the various processes and defining the most important hierarchical relations by determining the most important parameters (Berry, Broadbent & Otley 2005). However, the implementation of this tool does not mean the replacement of the traditional operations reports. The balanced scorecard would only enhance the effectiveness of using the accounting information for the managerial purposes. Considering the hierarchical relations between the various dimensions of the financial processes in Combined Ltd is crucial for setting the priorities and evaluating the collected data critically.

The balanced scorecard for Combined Ltd would consist of the four main components, including the financial, customer, internal business processes and learning and growth perspectives. The integration of these major strategies is important for compiling a comprehensive report without underestimating either financial or non-financial dimensions of the internal business strategies within the firm (Moynihan, D 2008; Merchant, Wim & der Stede 2007).

The measures and initiatives for each of these perspectives need to be developed after consideration of targets and objectives. Thus, the main objectives for the financial perspective of the overall company’s vision presuppose the improvement of the company’s financial performance through increase of the sales revenues and reduction of the operational costs. Consequently, the data on the sales revenues and the operational costs should be collected and evaluated before and after the structural reorganization of Combined Ltd into two divisions.

These would be the main financial measures required for the financial perspective. As to the internal business processes, the reorganization of the company itself would require aligning the policies of both divisions with the overall company’s vision and strategy as well as investments into the expert advising and training for the employees. The objective of goals congruence can be achieved through employing the outside experts specializing in the structural reorganization and educating the employees on the company’s vision and corresponding policies at each department. Taking into account the impact of the human factor, serious consideration should be given to the learning and growth perspective.

It is important to conduct trainings to educate employees on the changes in the reward and information systems. Enhancing employees’ understanding of the role of reorganization in the realization of the overall company’s vision is crucial for preventing the employees’ resistance to the innovations which can be caused with the lack of their awareness. Recognizing the dynamics of the market sector, the company should make investments into the marketing measures for improving the brand identity and enhancing the potential customers’ awareness of the products and their main advantages.

The implementation of the balanced scorecard could be an effective solution for the performance measurement in Combined Ltd which is especially important in the context of the recent organizational changes and creation of new divisions. Integrating the accounting and non-accounting approaches and taking into consideration the dynamic processes and human resource perspectives and capabilities within each division is significant for detecting the possible shortcomings and imposing appropriate measures for improving the situation.


Summing up the above mentioned data on the recent theoretical and empirical studies concerning the innovative practices of performance measurement, it can be stated that the balanced score card is the most appropriate choice for Combined Ltd which would allow integrating the accounting and non-accounting measures and considering the hierarchical relations between the various data segments. The implementation of this accounting tool would allow developing a specific report for each division and taking into account the importance of the human resource capabilities as one of the central factors affecting the firm’s accounting practices.

To develop a complex strategy for performance measurement, company’s management should not only collect the reliable data, but also implement appropriate measures for evaluating it critically and translating it into business practice.

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