Improving Business Performance Through Financial And Non-Financial Performance Measures

Choosing the performance measures for the company

Group Managing Director

Subject: Improve in business performance through financial and non-financial performance measures.

Choosing the performance measures for the company is a challenge. The performance measures always play an important role in the development of the strategy, compensating the managers and evaluation of the objectives of the organization. Firm uses various financial performance measures as well as non financial performance measures to improve the performance of the business. The financial performance measures like the return on investment and operating income helps in indicating the strategies that the company uses and implements them so that the value of the shareholders is increased. The financial measures often tend to be lagging indicators of the strategy. The non financial measures are monitored by the firm to understand their capabilities of the firms are destroying or building with the employees, customers, systems and customers for the profitability and future growth of the firm.

A Balanced scorecard is basically a systematic approach that is used to measure the performance and helps in translating the strategies of the organization in to clear objectives, targets and measures. There is an integration of both the short term as well as long term financial and non financial performance measures that are used across the organization which are based on the strategy of the organization (Bardy, 2006). The Balanced score card uses a combination of financial as well as non financial measures to scrutinize the organization’s performance.  The Balanced Score Card uses various for measuring the organization’s performance. The following are the important perspectives of the balanced score card in the context of ITS :

i.  The Financial perceptive:The main purpose of this perceptive is to review if the various strategies of the organization are towards the bottom line of the company. The balanced score card represents both the lagging as well as the leading performance measures of the company. Some of the traditional lagging indicators of the balanced score card includes financial measures like profitability, revenue and growth (Belkaoui, 2001). The various areas include return on investment, accounting records, cash flow and profits from particular contracts. ITS can keep watch on its financial performance by analyzing this department

ii. The customer perceptive: The main aspect that is reviewed by this perspective is how the organization is perceived by the customers. Today the buzz word is customer service. This concept is given importance because the customers posses a strong bargaining power and competitiveness. A balanced score card can prove out to be helpful for ITS so that it can retain its clients in long-term basis for delivering the repetitive services. Under this case study their major clients of the company are multination companies and US government(Brigham, 2001).

iii. The Internal business process viewpoint:This perceptive has its main focus on the business processes of the company that can be achieved and the customers can get both satisfaction as well as productivity.  As ITS is one of the leading company in US that is paving its way in UK as well, the company here needs to cover the various sub areas the includes the activities per function, duplicate activities, and streamlining the various activities so that right services are provided from the right department (Burns, 2004).  Some of the major internal services of the ITS include outsourcing the business processes and providing consultancy services in regard to IT services. According to the above case study it has been analyzed that the organizational structure of ITS is based on three major activities that include:

• Outsourcing services on matrix organizational basis
• Staff services that includes human resource, commercial and Finance
• Consultancy business as a small unit

Critical evaluation of Balanced Scorecard as a performance measuring tool of ITS (UK)

Thus, it is possible that ITS can integrate all its business activities by the integration of various departments that include research, development and finance by making use of this performance measuring tool.

iv. The Growth and learning perception: The focus of this perceptive is the areas that an organization shall focus on for further improvement so that the value can be created further. The main focus of this perspective is on the intangible assets of the company. The industry in which ITS operates in UK often requires expertise and intellectual so that the goals of the organization can be obtained. The company can track its learning level for its staff member so that the correct level of expertise can be performed(Friedlob, 2003).  Various principles of balanced scorecard are hereunder:

v. Translating the strategy into operational terms:The balanced scorecard can be helpful for the company to translates its strategies in to operational terms (Hopwood, 2007).

vi. Aligning the strategies: This is the major principle of balanced score card hence it plays a big role in ITS . The company has a high implementation of balanced score card in the company. According to the above case the company is facing low net margins hence the profitability is affected.

vii. Mobilizing the change with the help of leadership: This is the important tool for ITS because it helps in driving change for the excellence of company. Also the company can use effective communication in its various departments to reap the benefits. Therefore, it is very effective in achieving the objectives of organization.

From the above discussion it can be concluded that balanced score card has proven out to be very relevant for streaming the processes of the business so that the goals can be achieved though there are limitations but if wells structured so that actual benefits can be obtained. 

If ITS uses the principles of balanced score card than it can achieve lots of success. It is correct that balanced score card uses strategic plan that focuses on principle that helps in achieving the goals of the company. The expansion in the outsourcing industry is very rapid and therefore it is required that business needs to initiate the control the framework (Kastantin, 2005). ITS requires balanced scorecard in effective manner so that the performance of the company in four different areas. The four major components of balanced scorecard are:

Finance

One of the major aspect is monetary aspect that involves acceleration of growth in sales, generating revenue and maximization of profit by entering in to various new contracts by the ITS.  Along with this there were three main effective measures that have been identified are return on equity, rate of return and change in revenue (Kont., 2012). For reaching this objective the company may need to change certain conditions and initiative can further be taken to compare the actual figure with the targeted one. 

Innovation

As ITS is a consultancy firm so this aspect is very important for it. Research and learning can prove out to be very important for the company (Kinney, 2012). This aspect can be tracked by different measures that include quality and errors in the delivery of services and utilizing the capacity.

Creating Balanced Scorecard for ITS

Internal process

This aspect is also very important for ITS as the company intends to achieve the objectives like reducing the turnover of employees, high skill level and creating the leaders that are outstanding in their fields. There are three important measures provided for this area that include leadership readiness, satisfaction survey and ratio skill.

Customers

The measures that can be used to review the performance of the customers are retention and acquisition of customers so that various figures can be compared. Some of the main objectives of this area are securing the loyalty of customers and satisfaction of customers.  

Customer Perspective
Driver Measure	Objective	Outcome
Time	Reduce customer response time	Waiting time
Costs	Allocate the staff of IT on time	Complaints of customers
Performance and quality	Using qualified subcontractors	Professional qualification

Innovation Perspective
Driver Measure	Objective	Outcome
Innovative environment	Support and encourage innovation	Number of suggestions from staff
R&D	Remain competitive	Number of innovative products
Training of employees	Employing skilled IT staff	Training expenses on each employee

Financial Perspective
Driver Measure	Objective	Outcome
Overhead ratio	Reducing the overheads	Overhead per sales
Account receivable	Free cash for important tasks of business	Credit sales per account receivable
Net margin	Increase in net profit	Net profit per sales

Internal business  Perspective
Driver Measure	Objective	Outcome
Productivity	Standardizing control systems	Total number of deviations
Differentiation	Sustaining differentiated profile	Pre selecting customers
Employee skills	Employing more skilled staff	Hiring expenses per sales

Critical Evaluation Of The Accountant Role

The scope of management accounting is broader than financial accounting as it is modern concept. A benchmark was set by the ITS company to achieve the net margin of 6% that was difficult to achieve as the financial and accounting was not efficient (Lillis 2008). The company shall set the target that shall be based on the forecasting. According to the analysis of the case study various loopholes can be identified in the company that includes:

i. The computer systems used in ITS was not fully able to accommodate various variations hence the arrangements were not able to be monitored at the individual level(Eisenberg 2016).

ii. There was no continuous monitoring by the company as the clarity of charges was not clear due to which the company has to suffer as charges that were required to be incurred by the clients of the ITS.

iii. The contracts of the company that were small were more expensive as compared to the large contracts as inability of meeting the net margin often increases the average contract size.

iv. The administrative and financial controls were complex in the organization that led to proper standardization(Askim 2004).

v. The resources were utilized in an ineffective manner as there was wastage of organizational resources.

Due to the above mentioned loopholes in Integrated Technology services it was required that an accountant shall be appointed in the team (Bryman 2004). The accountant was required to play the below mentioned roles: 
It was observed that tax handling is very important for ITS so that the revenue generated by the company is efficiently utilized. The company is required to handle its profits in proper manner so that it is able to minimize its tax amount. For reducing the tax amount it is required that the firm shall utilize its capital in efficient manner.
Budgeting is very important for the firm as most of its business is from the contractors so that the actual cost can be more than the tender amount. Along with this it is also required that the company shares its profits on percentage basis. So it is very important for the company to have effective budgeting so that the contracts can be made more profitable. Hence, speed and accuracy will also be ensured by proper budgeting by the company (Chan 2004).

Proper Decision Making

It is further required by the company that it works for appropriate decision making so that it could achieve its net margin and the enterprise objectives (Chen 2006). If manger doesn’t take proper decisions than it may be possible that company might need to face many challenges that includes inadequate allocation of the budget, poor budgeting and improper tax handling.  It shall also be ensured by the mangers that it takes appropriate decisions that are feasible in almost every situation.
The pricing method that is utilized by the company for the better management of the financial terms is known as target costing (Greatbanks 2007). Target costing is also known as the cost management tool that is normally used for reducing the overall product cost over the life cycle. It can be very well done by the company through research, design, production and engineering. The financial objectives of the company can be achieved by the proper use of cost accounting. According to the case study above it can be observed that company has a markup value of 12%. The company has been planning to outsource the arrangements for the information system and record the management functions (Kaplan 2001). According to that the company would be contributing 60% in remuneration and under runs for its project according to the material and time consumption. Through this method it would be easy for ITS UK to determine the cost of the product by considering the price of the product.  If we consider the sales figure than kit will be possible to develop optimum cost structure so that the company is able to earn high profits.

The steps that can be considered while utilizing the target costing method by the company are explained below:

1. Conduct research: It would be required that the company reviews the market initially where it is planning to sell its products. For this it will be required that the company designs its production process according to the requirement and need of its customers.Computing the maximum cost: Under this step a gross margin will be provided by the company to its design team that the company would be required to be earned. This strategy would help the company to determine the maximum target cost that is very important to be attained by the product.

2. Engineering the product:Under this step the main focus is to know the component price of the product by the engineers by taking in to consideration the delivery, quality and quantity of the merchandise.  Through this the cost will be reduced after the wastages are eliminated.

3. Ongoing activities:The step will be carried on after the designed is finalized and is approved further. For this a designed plan would be implemented so that the objectives and aim of the organization are achieved (McAdam 2005).

4. So, here it can be concluded that the above statement is true that the 20% gross margin is not enough for achieving the net margin of 6%. This is because of higher distribution and administration expenses (Moullin 2004). According to the financial data that has been provided it can be noticed that the company has to pay training costs, overhead costs and other costs. Through this the gross margin of entity will be reduced and the company will not be able to attain the desired profits.

Shared Ownership Scheme: For keeping the employees motivated the employees stock ownership plan is very effective as it gives a share of the company to the employees so that the employees would become the shareholders of the company. With the help of this plan the employees could participate in the decisions making process of the company. This further helps in aligning the interests of the employees as well as the firm.  The plan is used by the company for appreciating the value of its shares in the market and further ensuring that the shares of the company have been performing well in the market. This plan helps in boosting the morale of the employees as they become the shareholders of the company and can participate in the important decisions of the company (Moullin 2007). Further they consider themselves as the part of the organization and in this way they feel their value in the enterprise. This further helps the employees to work hard so that they could perform well and help the organization in achieving its goals. That way the employees are able to contribute their full potential towards the achievement of goals of the organization. Some of the pros of employee stock ownership through which the employee’s performance can be improved:

• It helps in improving the presence of the employees at the workplace
• Employees are able to build trust towards the management
• The employees can contribute to the decision making process of the firm
• It also helps in increasing the pay and benefits of the employees
• It further helps in creating job satisfaction in the minds of the employees
• The employees can contribute to the full potential as uniformity in goals at individual and organizational level is ensured by the plan(Wisniewski 2004).

Conclusion

According to the research conducted on the Integrated Technology services it can be concluded that the company has various opportunities to grow in the US market. For growing in the UK market it is required that the company uses computerized accounting for making its operations effective and easy. It is required that the company hires a manager for improving the effectiveness of the accounting procedures of the company.  A manager shall be diligent in performing its duties as it is not necessary that the computerized systems are effective in every manner/ It is the duty of the manger to find out the defects in the accounting process, Further it can also be concluded that the employee stock ownership scheme works well in improving the performance of the employees.

Askim, J 2004, ‘Performance management and organizational intelligence: adapting the balanced scorecard in larvik municipality.’, International Public Management Journal, vol 7(3), pp. 415-438.

Bardy, R 2006, Management control in a business network: new challenges for accounting. Qualitative Research in Accounting & Managemen, New York.

Belkaoui, A 2001, Advanced management accounting, Greenwood Publishing Group., London.

Brigham, E 2001, Fundamentals of Financial Management. , Thomson Learning.

Bryman, A 2004, Social research methods, Oxford: Oxford University Press..

Burns, J,HTAYH 2004, ‘Management accounting education and training: putting management in and taking accounting out. ‘, Qualitative Research in Accounting & Management, 2004, pp. 1(1). pp.1 – 29.

Chan, YCL 2004, ‘Performance measurement and adoption of balanced scorecards: a survey of municipal governments in the USA and Canada.’, International Journal of Public Sector Management, vol 17(3), pp. 204-221.

Chen, SH,YCC,&SJY 2006, ‘The application of balanced scorecard in the performance evaluation of higher education’.

Eisenberg, P 2016, ‘The Balanced Scorecard and beyond – Applying Theories of Performance Measurement, Employment and Rewards in Management Accounting Education’, International Research Journal of Management Sciences, vol Vol. 4(7), pp. pp. 483-491.

Friedlob, TGASFLL 2003, Essentials of Financial Analysis, John Wiley & Sons.

Greatbanks, R,&TD 2007, ‘The impact of balanced scorecards in a public sector environment Empirical evidence from Dunedin City Council, New Zealand.’, International Journal of Operations & Production Management, vol 27(8), pp. 846-873..

Hopwood, AG 2007, Handbook of management accounting research, Oxford University Press., London.

Kaplan, RS,&NDP 2001, ‘Transforming the balanced scorecard from performance measurement to strategic management: part I.’, Accounting Horizons, vol 15(1), pp. 87-104..

Kastantin, TJ 2005, ‘Beyond earnings management: Using ratios to predict Enron’s collapse.’, Managerial Finance, 2005, pp. pp.35–51.

Kinney, RMARAC 2012, Cost Accounting: Foundations and Evolution, 9th edn, Cengage Learning.

Kont., K-R 2012, ‘New cost accounting models in measuring of library employees’ performance.’, Library Management, 2012, pp. pp. 50 – 65.

Lillis, A 2008, ‘Qualitative management accounting research: rationale, pitfalls and potential: A comment on Vaivio.’, Qualitative Research in Accounting & Management, 2008, pp. pp.239 – 246.

McAdam, R,HSA,&CC 2005, ‘Performance management in the UK public sector: addressing multiple stakeholder complexity. ‘, International Journal of Public Sector Management, vol 18(3), pp. 256-273..

Moullin, M 2004, ‘ Eight essentials of performance measurement.’, International Journal of Health Care Quality Assurance, vol 17(3), pp. 110-112..

Moullin, M,SJ,SJ,PC,CJ,&GC 2007, ‘Using the public sector scorecard in public health.’, International Journal of Health Care Quality Assurance, vol 20(4), pp. 281-289..

Wisniewski, M,&OS 2004, ‘ Developing balanced scorecards in local authorities: a comparison of experience.’, International Journal of Productivity and Performance Management, vol 53(7), pp. 602-610.