Performance and Performance Measurement in Conventional Accounting and Finance System
All organizations whether profit oriented or non-profit ones are destined towards achievement of some predefined goals and targets. These goals, which are set by the management as very specific purpose for the existence of the organization, act as standards against which actual performance of the organization is later measured.
The very first step of any organizational effort is taken with situating the expected targets and thresholds. Then plans to accomplish these goals are chalked out, human and other resources are organized, efforts of organizational members are directed ...view middle of the document...
This article intends to develop a framework of tools and methods used to measure the organizational performance. We start with defining performance from different perspectives, and then proceed with the need for measuring the organizational performance. Our next focus is how the organizational performance is measured using both financial and non financial measurement tools. We will conclude our discussion with our deductions from the stated measurement techniques.
UNDERSTANDING PERFORMANCE AND ITS MEASUREMENT
Despite the more contemporary consideration devoted to it, performance management has been in spotlight of management accounting over the years. While organizational performance covers all areas of firm outcomes, i.e. financial performance, product market performance and shareholder return. In strict sense of management accounting, performance gives information about decision making and scorecard etc. As we will discuss in the later part of this write up, performance was initially supposed to be measured only by financial outcomes of the organization. A primitive discussion of financial performance was represented by Simon et al. (1954) who defined three functions of management accounting information as Decision-making (What should I do?), Attention-directing (What should I pay attention to?) and Scorecard (How well am I doing?).
A more recent view of organizational performance has been presented by the research of Lohman et al (2004) that provides a detailed insight into relevant aspects of organizational performance. These aspects include both financial as well as behvioural facets of organizational performance. Their research concludes that performance has three relevant aspects namely Resources, Output, and flexibility. They further elaborate these aspects and state that Resources include Expenses (e.g. distribution costs, inventory- related costs, service costs) and Assets (e.g. inventory carrying costs), whereas Output includes Financial output (e.g. sales, profit, return on investment), Time (e.g. customer response time, delivery lead time, on-time deliveries, fill rate), and Quality (e.g. reliability, shipping errors, customer complaints). Finally Flexibility comprises of Volume flexibility (ability to respond to changes in demand), Delivery flexibility (ability to respond quickly to tight delivery requests), Mix flexibility (ability to respond to changes in the mix of products demand), New product (and modified product) and Flexibility (ability to respond to demand for new products). Hence Lohman et als (2004) provided a broad understanding of organizational performance by including three aspects pertinent to performance.
On the other hand study of Richard et al. (2009) focused on the “output” aspect of the performance and further broadened its characterization by proposing that organizational performance encompasses three specific areas of firm outcomes: (a) financial performance (profits, return on...