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Financial Performance Measures - Coggle Diagram
Financial Performance Measures
Why measure financial performance
To measure the economic results of a business units within a decentralized organization.
Aligns to financial objectives
Aggregates/disaggregates financial objectives
Standardized measurement system
Gives autonomy to units for activities.
Responsibility centers
Revenue Centers
Revenues
Profit Centers
Costs & Revenue
Cost Centres
Costs
Investment Centres
Costs, revenues and significant control over investment.
Controllability Principle
Reasons to hold managers responsible for uncontrollable factors.
help managers develop a holistic view of organisation.
increase awareness and encourage managers to find ways to improve performance.
Uncontrollable costs need to be covered
Reasons not to hold managers responsible for uncontrollable factors
Shareholders are better able to diversify this risk
managers will need to be compensated for this
They may engage in undesirable actions like gaming and manipulation behaviors.
Limitations for financial performance measurement.
Too Narrow, doesn't capture non financials
Backwards Looking
Not Timely
Too Aggregated (often requires approximations)
Too Financial
Motivate gaming and manipulation
Myopia
Lag Measures
Measures outputs
Shows achievements not objectives
Shows whether operational changes have translated into improved outcomes.
Most financial measures are Lag.