Financial Performance measures in a traditional business system
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Measuring the financial ability is a very important approach for any business entity in order to enhance its overall performance, profits and to maintain a financial stability. Financial performance measures are done in order to depict the company’s overall performance. This is done by performing some simple mathematical calculations. The most common way of measuring one’s financial measures is by calculating the financial ratios. These financial ratios can be used to compare the financial abilities of different companies. Thus these ratios are kind of scores based on which the companies are rated. These ratios can also help the company management in creating business plans and creating presentations for their customers and investors.
Some of the common financial ratios used as financial measures are: The liquidity Ratios: These ratios are used to find out “how much ready cash or near cash a company has?” Some of the liquidity ratios are
1) Current ratio
2) Quick ratio The Profitability Ratios: These ratios measure the return on investment or the profitability. The most common profitability ratios are
1) Profit ratio
2) Earning power
3) Return on investment of Assets
4) Return on common equity. Asset Ratios: These ratios are used to measure the asset management ability. Some of the common asset ratios are
1) Inventory turnover
2) Days of receivable outstanding
3) revenue to assets. Debt Ratios: These ratios are used to find out the amount of debt the company has with respect to the revenue the company is generating. Some of the common debt ratios are
1) Earnings per share
2) Price earnings Security Ratios: These measures are useful particularly to the shareholders and owners. Some of the common security ratios used are
1) Earnings per share
2) Price earnings
3) Book value
5) Yield Demerits of the Financial Ratios
These financial ratios represent only the present condition of the company and therefore does not gives us a exact picture of how the company has been progressing in the long run. For example if a company had a huge loss due to the negligence of the management in the past, the ratios do not reveal such information. Also these ratios do not even disclose some of the present situations in the company. For example if the company is about to lose a huge client, the ratios does not give any idea about the information like these. Therefore we can say that these ratios cannot be solely used in order to judge a company’s capability as these ratios does not give us the inside picture of the situations in the company. Non-Financial Measures in a traditional business system
As already mentioned in the above section, the traditional financial measures cannot be solely used to measure the company’s capability. Therefore many non-financial measures have come up which will give us a much clearer picture of the company’s standing in the market.
The first advantage of these nonfinancial measures over the traditional financial measures is that the financial measures focus on the short term performance of the company whereas the non-financial measures are a closer link to the company’s long term strategies.
Secondly we can say that the most important asset to the organization is the intellect of the employees and the customer satisfaction and loyalty rather than the “hard assets”. Therefore efforts should be taken in measuring these aspects and looking for the strategies to improve them. Betterment of these intangible assets will obviously lead to the improvement of the other hard assets which are measured using the traditional financial measures. But then again as the article “Coming up short on non-financial performance measurement” states that there also some disadvantages attached to these measures. Therefore it is the company’s responsibilities to take efforts in efficiently utilizing these measures inorder to create the future business plans for the company. Financial And Non-financial measures in lean system
As we all know lean manufacturing deals with the reduction of wastes. Thus efficient utilization of available resources plays a key role here. Therefore implementation of lean principles will force the company to increase their use of nonfinancial performance measures so that they can provide relevant information to the employees working in an environment which focuses on customer satisfaction, flexibility etc. Some of the non-financial performance measures which are directly related to the lean principles are: measuring the lead times, measuring the set up times, improving the production quality etc.
Now coming to the financial measures in the lean system. The financial measures in the lean system in different from the traditional accounting system and thus is called “Lean accounting”. In lean accounting, the principles of lean are made used in the company’s accounting processes. This is exactly same as applying these principles to any other process. The main goal is to reduce time, reduce error, and make it more understandable. Here the complex costing processes, the confusing financial ratios are replaced by the financial reports that are written in plain languages so that it is clear and understood even by somebody who is not form accounting background. Here clear cut information is given as to what are the actual figures are where are the improvements needed.
Thus each and every employee of the company has an idea of the standing of the company and contributes towards the betterment of the company. Therefore here are some of the advantages of lean accounting over the traditional accounting: First of all as already mentioned Lean accounting is less complex than the traditional accounting and therefore easily understood by everyone. Lean accounting is also less costly than the traditional accounting. Lean accounting eliminates many transactions and reports associated with the traditional accounting system. By doing so it is therefore reducing lots of time and effort that would have wasted by the employees. Thus it can be said that the financial and nonfinancial measures in a lean system is far more efficient than that in a traditional business system. We can also say that in a lean system, since the main focus is on reduction of wastes, we can be sure that the performance measures considered are efficient enough since they have lean principles induced in them.
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