The Principal Methods Of Analysing Company Performance Accounting Essay


Performance measurement is a key issue for all organisations. Management needs to measure the results of its actions, not only in comparison to competitor organisations, but in relation to its past performance too. This is a difficult area since the amount, complexity and interpretations place on data, both published and unpublished, have an infinite variability. (Robertson, 2007)

According to Robertson (2007) The principal methods of analysing using ratios and important areas are liquidity, financial structure (gearing), and employee based ratios.

The growing importance of strategic measurement of financial measures is being constantly highlighted by academic scholars. According to Alfred Rappaport (2007) Strategic plans of the firms requires rational economic evaluation and a new approach which considers shareholder value. Rappaport (2007) argues that in accounting ROI and ROE, the increase in earnings is no guarantee of shareholder value. Companies for example Owens Illinois,

Atlantic Richfield, Sun Co., and Union Oil of California are ones which have adopted performance plan based on ROE. Disillusionment with ROI or ROE approach is the ratio which comes from the profit planning process is compared to market base cost of capital and hence organisations had switch to performance plans.

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In addition authors Merchant (1985), Chakravarthy (1986), Kaplan and Norton (1996) Emmanuel and Otley (1995) are of the view that the financial accounting systems focus on the historic nature revealing the past actions but nothing about the future. Also they don’t show the elements which lead to poor or good results.

A Study by Rappaport (2007) suggests that use of ROI as a evaluation of organisations performance at the business and corporate level can lead to misallocation of resources of the firm . the three reasons explained because of economic rate of return depends on prospective cash flow but ROI calculates taking in to account the depreciated investments made in past. also firms with larger investments then it would book lower ROIs.

According to Norreklit (2000) the issue with the financial measures gets aggravated if the company is forced to pursue short term financial results rather than the company’s long term goals. For example the new investments have negative effects to short term return on investments because of assets valuation and deprecation policies. Also Senior Managers in companies refuse to invest in the innovation and growth potentials and they prefer the short term investment plans.

Authors Kiechel, (1984); Mintzberg, (1994); Simons, (1995) argue that strategic plans are difficult to implement in a firm and cause more issues because most of the times the strategic plans made remain remote from the day to day activities carried out in the firm.

A study by Mintzberg( 1987) shows that there exists a gap between strategies in the planning made and in the strategies implemented. To reduce such gaps proper techniques needs to be used by the organisations. For example the various management techniques and tools like

Change management, organizational staff-controlled processes of change and trainings.etc According to Parker, (1979); Merchant, (1985); Maciariello and Kirby, (1994) only financial measures are not sufficient to achieve set goals of organisation and but they need to be balanced with the staffs decision making process and the actions taken by the staff in an organisation.

Many theorists have shown the growing importance of non financial measures. Non Financial measures are not new tools. General Electric was the firm which used non financial measure in the year 1950. Non financial measure in general electric was applied in each division and was based on eight areas of measurement (Anthony et al, 1989, pp 125).

Non financial Measurement systems are known to be based on the local systems fulfilling local needs and not considering the strategic business need of an organisation (Merchant 1985)

But recent changes in the application of non financial measurement systems shows very strong and constructive efforts of the organisations to base the non financial measurements systems to the strategy of the firm ( McNair et al., 1990; Beischel and Smith, 1991; Grady, 1991; Kaplan and Norton, 1992; Euske et al., 1993; Kaplan and Norton, 1996)

Author Grady, (1991) is of the view that the strategic objectives of the firms needs to be broken down into critical success factors of the firms which determine the key areas the firms needs to focus to achieve its objectives and reach its goals and take critical actions accordingly.

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McNair et al., (1990); study was based on the performance pyramid which has vision of the organisation broken into financial and non financial measurement system. These financial and non financial systems show the various measurement and targets for the measurements.

Both academics and practioners have recognised the balance scorecard as an effective model of performance evaluation of an organisation.

According to Kaplan and Norton (1992), balanced scorecard is a model which integrates both non financial and financial measurement system. The balance scorecard contains the measurements for outcomes and the drivers of the performance. These are linked in cause and effect relationship. The benefits of balanced scorecard are in the alignment of the personal and departmental goals to the strategy of the organisation.

De Haas and Kleingeld (1999) are of the view that the cause and effect relationship affect in the balance scorecard makes the performance measurement a feed-forward control system.

For a public limited company stock price is one way by which the organisations performance is evaluated but Murphy and Milbourn (1996) are of the view that it may not be the efficient parameter the reason given for this is that it’s not the only factor but other factors like firms executives needs to be considered. According to Day and Fahey (1988) marketing activities which were traditionally focused on the product are now contributing to returns to shareholders. corporate governance is one another measure which helps the public limited companies helps investor performance boosting shareholders confidence in the firm . The corporate governance is one such standard regulation which helps the shareholders to protect their interest and maintain an efficient level of performance of firms in an industry. Hence, increasing shareholders value and industry growth levels. (Williamson 1984)

The use of financial accounting systems in one or another form is a must to evaluate an organisations performance. Activity based cost analysis identifies the various products and customers which are the best profitable to the firm ( Turney, 1991; Kaplan and Cooper, 1998 ) Balance scorecard is one method which could be considered with the various financial ratios and an evaluation of the financial performance of an organisation can be made. The financial measure can be clubbed with the non financial measure to link the financial ratios to the strategic business and corporate objectives to achieve the set goals of an organisation. By using financial along with nonfinancial can help achieve a balance of the performance of the firm and a proper evaluation can be made.

The shareholders are the major part of a public limited firm and hence a appropriate evaluation can help a firm achieve goodwill in the market or the industry the firm is operating.