E) Performance Measurement and control

1. Performance analysis in private sector, public sector and not-for-profit organisations

a) Describe, calculate and interpret suitable financial performance indicators (FPIs) for example
profitability, liquidity, efficiency and gearing.[2]

Three main classes of ratios will be reviewed

– Profitability
– Liquidity
– Risk.

I. Measuring profitability

The primary objective of a company is to maximise profitability. Profitability ratios can be used to
monitor the achievement of this objective.

A. Gross profit margin

This is the gross profit as a percentage of turnover.

A high gross profit margin is desirable. It indicates that either sales prices are high or that production
costs are being kept well under control.

B. Operating profit margin

This is the operating profit (turnover less all expenses) as a percentage of turnover.

A high operating profit margin is desirable. It indicates that either sales prices are high or that all costs
are being kept well under control.

C. Return on capital employed (ROCE)

This is a key measure of profitability. It is the operating profit as a percentage of the capital employed.
The ROCE shows the operating profit that is generated from each $1 of assets employed.

Where capital employed = total assets less current liabilities or total equity plus long-term debt.

If operating profit (profit before finance charges and tax) is not given in the question, use net profit
instead.

A high ROCE is desirable. An increase in ROCE could be achieved by:

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E) Performance Measurement and control

 Increasing operating profit, e.g. through an increase in sales price or through better control of
costs.
 Reducing capital employed, e.g. through the repayment of long term debt.

The ROCE can be understood further by calculating the operating profit margin (operating profit/sales ×
100) and the asset turnover:

ROCE = operating profit margin × asset turnover

D. Asset turnover

This is the turnover divided by the capital employed. The asset turnover shows the turnover that is
generated from each $1 of assets employed.

A high asset turnover is desirable. An increase in the asset turnover could be achieved by:

 Increasing turnover, e.g. through the launch of new products or a successful advertising
campaign.
 Reducing capital employed, e.g. through the repayment of long term debt.

II. Measuring liquidity

A company can be profitable but at the same time encounter cash flow problems. Liquidity and working
capital ratios give some indication of the company's liquidity.

A. Current ratio

This is the current assets divided by the current liabilities.

The ratio measures the company's ability to meet its short term liabilities as they fall due.

A ratio in excess of 1 is desirable but the expected ratio varies between the type of industry.

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E) Performance Measurement and control

A decrease in the ratio year on year or a figure that is below the industry average could indicate that the
company has liquidity problems. The company should take steps to improve liquidity, e.g. by paying
creditors as they fall due or by better management of receivables in order to reduce the level of bad
debts.

B. Quick ratio (acid test)

This is a similar to the current ratio but inventory is removed from the current assets due to its poor
liquidity in the short term.

The comments are the same as for the current ratio.

C. Inventory holding period

This indicates the average number of days that inventory items are held for.

An increase in the inventory holding period could indicate that the company is having problems selling
its products and could also indicate that there is an increased level of obsolete inventory. The company
should take steps to increase inventory turnover, e.g. by removing any slow moving or unpopular items
of inventory and by getting rid of any obsolete inventory.

A decrease in the inventory holding period could be desirable as the company's ability to turn over
inventory has improved and the company does not have excess cash tied up in inventory. However, any
reductions should be reviewed further as the company may be struggling to manage its liquidity and may
not have the cash available to hold the optimum level of inventory.

D. Receivables (debtor) collection period

This is the average period it takes for a company's debtors to pay what they owe.

An increase in the receivables collection period could indicate that the company is struggling to manage
its debts. Possible steps to reduce the ratio include:

 Credit checks on customers to ensure that they will pay on time

 Improved credit control, e.g. invoicing on time, chasing up bad debts.

A decrease in the receivables collection period may indicate that the company's has improved its
management of receivables. However, a receivables collection period well below the industry average
may make the company uncompetitive and profitability could be impacted as a result.

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E) Performance Measurement and control

E. Payables (creditor) period

This is the average period it takes for a company to pay for its purchases. If credit purchases are not
available, ‘purchases’ or ‘cost of sales’ should be used.

An increase in the company's payables period could indicate that the company is struggling to pay its
debts as they fall due. However, it could simply indicate that the company is taking better advantage of
any credit period offered to them.

A decrease in the company's payables period could indicate that the company's ability to pay for its
purchases on time is improving. However, the company should not pay for its purchases too early since
supplier credit is a useful source of finance.

III. Measuring risk

In addition to managing profitability and liquidity it is also important to manage risk. The following ratios
may be calculated:

A. Financial gearing

This is the long term debt as a percentage of equity.

A high level of gearing indicates that the company relies heavily on debt to finance its long term needs.
This increases the level of risk for the business since interest and capital repayments must be made on
debt, where as there is no obligation to make payments to equity.

The ratio could be improved by reducing the level of long term debt and raising long term finance using
equity.

B. Interest cover

This is the operating profit (profit before finance charges and tax) divided by the finance cost.

A decrease in the interest cover indicates that the company is facing an increased risk of not being able
to meet its finance payments as they fall due.

The ratio could be improved by taking steps to increase the operating profit, e.g. through better
management of costs, or by reducing finance costs through reducing the level of debt.

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E) Performance Measurement and control

C. Dividend cover

This is the net profit divided by the dividend.

A decrease in the dividend cover indicates that the company is facing an increased risk of not being able
to make its dividend payments to shareholders.

b) Describe, calculate and interpret suitable non-financial performance indicators (NFPIs).[2]

As we will see, a company may choose to use a

mixture of financial and non-financial
performance indicators in order to achieve the
optimum system for performance measurement
and control.

A firm’s success usually involves focussing on a

small number of critical areas that they must
excel at. These factors vary from business to
business but could include:

 Having a wide range of products that

people want.
 Having a strong brand name or image.
 Low prices.
 Quick delivery.
 Customer satisfaction, perhaps through
high quality.

Most of these are best assessed using non-financial performance indicators. Financial performance
appraisal often reveals the ultimate effect of operational factors and decisions but non-financial
indicators are needed to monitor causes.

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E) Performance Measurement and control

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E) Performance Measurement and control

c) Analyse past performance and suggest ways for improving financial and non- financial performance.
[2] - CGT

Analyzing past performance is a crucial step in identifying strengths, weaknesses, and areas for
improvement in both financial and non-financial aspects of an organization. Here's a structured
approach to analyzing and improving performance:

1. Gather Data and Metrics: Collect historical data on financial metrics such as revenue, profit
margins, cash flow, return on investment, and non-financial metrics such as customer
satisfaction, employee engagement, market share, and innovation metrics.
2. Financial Performance Analysis:
o Trend Analysis: Compare financial data over multiple periods to identify growth or
decline patterns.
o Ratio Analysis: Calculate financial ratios (e.g., liquidity ratios, profitability ratios, solvency
ratios) to assess the financial health of the organization.
o Benchmarking: Compare your organization's financial performance against industry
peers to identify gaps and areas for improvement.
3. Non-Financial Performance Analysis:
o Surveys and Feedback: Gather feedback from customers, employees, and other
stakeholders to gauge their perceptions of your products/services and organizational
culture.
o Key Performance Indicators (KPIs): Identify and track non-financial KPIs that align with
your strategic goals, such as customer retention rate, employee turnover rate, and net
promoter score.
o Innovation and Creativity: Assess the organization's ability to innovate, adapt to changes,
and stay competitive in the market.

d) Explain the causes and problems created by short-termism and financial manipulation of results. [2]

There are a number of problems associated with the use of financial performance indicators to monitor
performance:

A. Short-termism

Linking rewards to financial performance may tempt managers to make decisions that will improve
short-term financial performance but may have a negative impact on long-term profitability. E.g. they
may decide to cut investment or to purchase cheaper but poorer quality materials.

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E) Performance Measurement and control

B. Manipulation of results

In order to achieve the target financial performance and hence their reward, managers may be tempted
to manipulate results. For example:

 Accelerating revenue – revenue included in one year may be wrongly included in the previous
year in order to improve the financial performance for the earlier year.
 Delaying costs – costs incurred in one year may be wrongly recorded in the next year's accounts
in order to improve performance and meet targets for the earlier year.
 Understating a provision or accrual – this would improve the financial performance and may
result in the targets being achieved.
 Manipulation of accounting policies – for example, closing inventory values may be overstated
resulting in an increase in profits for the year.

e) Discuss the issues organisations face by favouring short-term financial gain over long-term
sustainability. [2] - CGT

Favoring short-term financial gain over long-term sustainability can lead to a range of issues that impact
the organization, its stakeholders, and even society as a whole. While it's natural for organizations to
focus on immediate profits, ignoring long-term sustainability considerations can have significant negative
consequences:

1. Erosion of Value: Prioritizing short-term financial gains might lead to decisions that sacrifice long-
term value creation. For instance, cost-cutting measures that compromise product quality or
employee well-being can tarnish the brand and damage customer trust in the long run.
2. Lack of Innovation: Investments in research, development, and innovation are essential for
sustained competitiveness. Organizations that focus solely on short-term profits may cut back on
these investments, hindering their ability to adapt to changing market trends and technological
advancements.
3. Neglect of Employee Well-being: A myopic focus on short-term financial gains might lead to
employee burnout, low morale, and reduced job satisfaction. These factors can impact
productivity, creativity, and overall organizational culture.
4. Decline in Customer Loyalty: Short-term gains that prioritize immediate revenue can lead to
decisions that compromise customer satisfaction and loyalty. This can result in reduced repeat
business and increased customer churn.
5. Environmental Impact: Neglecting long-term sustainability often involves unsustainable resource
consumption and practices that harm the environment. Such actions can result in negative
publicity, regulatory fines, and long-term damage to the brand's reputation.

In contrast, organizations that prioritize long-term sustainability often experience benefits such as
enhanced brand reputation, improved stakeholder relationships, greater resilience, and access to a
broader range of opportunities.

Balancing short-term financial objectives with long-term sustainability is essential for an organization's
overall success and positive impact on society. Strategies that consider both timeframes can help
organizations achieve sustainable growth while maximizing value creation for all stakeholders.

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E) Performance Measurement and control

f) Explain and interpret the Balanced Scorecard, and the Building Block model proposed by Fitzgerald
and Moon.[2]

I. The Balanced Scorecard

The balanced scorecard approach to performance measurement and control emphasises the need to
provide management with a set of information which covers all relevant areas of performance.

It focuses on four different perspectives and uses financial and non-financial indicators.

The four perspectives are:

 Customer – what is it about us that new and existing customers value?

 Internal – what processes must we excel at to achieve our financial and customer objectives?
 Innovation and learning – how can we continue to improve and create future value?
 Financial – how do we create value for our shareholders?

Within each of these perspectives a company should seek to identify a series of goals and measures.

Benefits of the balanced scorecard:

 It focuses on factors, including non-financial ones, which will enable a company to succeed in the
long-term.
 It provides external as well as internal information.

Problems with the balanced scorecard:

 The selection of measures can be difficult. For example, how should the company measure
innovation? Obtaining information can be difficult. For example, obtaining feedback from
customers can prove difficult.
 Information overload due to the large number of measures that may be chosen.
 Conflict between measures. For example, profitability may increase in the short-term through a
reduction in expenditure on staff training.

II. The Building Block Model

Fitzgerald and Moon developed a framework for the design

and analysis of performance management systems, particularly
within the context of service industries.

They based their analysis on three building blocks:

Dimensions

Dimensions are the goals for the business and suitable

measures must be developed to measure each performance
dimension. Dimensions are the areas that yield specific
performance metrics for a company.

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E) Performance Measurement and control

The six dimensions in the building block model can

be split into two categories:

 downstream results (competitive and

financial performance) and
 upstream determinants (quality of service,
flexibility, resource utilization and
innovation) of those results.

The last four are the drivers of the top two.

Standards

Standards are the targets set for the metrics

chosen from the dimensions. To ensure success it
is vital that employees view standards as
achievable, fair and take ownership of them.

Rewards

Rewards are the motivators for the employees to

work towards the standards set.

The reward system should be clearly understood

by the staff and ensure their motivation. The
rewards should be related to areas of
responsibility that the staff member controls in
order to achieve that motivation.

g) Discuss the difficulties of target setting in qualitative areas.[2] - CGT

Setting targets in qualitative areas can be a challenging task due to the inherent nature of qualitative
data and the complexity of the factors involved. Unlike quantitative areas where measurements are
precise and objective, qualitative areas deal with subjective, non-numerical data that often involve
opinions, perceptions, emotions, and context. Here are some of the difficulties associated with target
setting in qualitative areas:

1. Subjectivity and Interpretation: Qualitative data relies on human interpretation and judgment.
Different individuals might interpret the same data differently, leading to variations in target-
setting decisions. This subjectivity can result in inconsistencies and difficulties in ensuring that
targets are universally understood and accepted.
2. Lack of Standardization: Unlike quantitative data that can often be standardized and measured
using established metrics, qualitative data lacks clear standards for measurement. This absence
of standardized criteria makes it challenging to set precise and consistent targets across different
contexts.

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E) Performance Measurement and control

3. Limited Data Availability : Qualitative data is often collected through methods like interviews,
observations, and focus groups. Such data might be limited in quantity and scope, making it
difficult to identify trends, patterns, or establish reliable benchmarks for target setting.
4. Complexity of Factors: Qualitative areas often deal with complex and interrelated factors that
cannot be easily quantified. For example, in fields like psychology or social sciences, human
behavior is influenced by a multitude of psychological, social, and cultural factors that cannot be
reduced to simple numerical targets.
5. Dynamic Nature of Qualitative Data: Qualitative data can be dynamic and change over time due
to evolving circumstances, changing perspectives, or new information coming to light. This
dynamic nature makes it challenging to set rigid targets that remain relevant over extended
periods.

h) Explain the need to allow for external considerations in performance management, including
stakeholders, market conditions and allowance for competitors.[2]

Performance measures provide useful information to management which aid in the control of the
business.

However, they need to be considered in the wider context of the business' external environment to gain
a comprehensive overview of how the business has performed and to inform plans and develop business
activities to improve its performance. External considerations which are particularly important are:

 Stakeholders – a stakeholder is any individual or group that has an interest in the business and
may include:
– shareholders
– employees
– loan providers
– government
– community
– customers
– environmental groups.

Stakeholders will have different objectives and companies may deal with this by having a range
of performance measures to assess the achievement of these objectives.

 Market conditions – these will impact business performance. For example, a downturn in the
industry, or in the economy as a whole, could have a negative impact on performance.
 Competitors – the actions of competitors must also be considered. For example, company
demand may decrease if a competitor reduces its prices or launches a successful advertising
campaign.

i) Interpret performance in the light of external considerations and the need to consider sustainability.
[2] - CGT

Interpreting performance in the context of external considerations and sustainability involves analyzing
an organization's achievements and challenges while taking into account the broader impact on its
stakeholders, society, and the environment. This approach goes beyond traditional financial metrics to
consider long-term viability and responsible practices. Here's how to interpret performance in this light:

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E) Performance Measurement and control

1. External Factors Analysis: Understand the external factors that influence your organization's
performance. These can include economic conditions, market trends, regulatory changes,
technological advancements, and geopolitical events. Analyze how these factors affect your
financial and non-financial performance.
2. Stakeholder Perspective: Consider the perspectives and needs of different stakeholders,
including customers, employees, investors, suppliers, and the community. Assess how your
organization's performance aligns with their expectations and contributes to their well-being.
3. Environmental Impact: Evaluate your organization's impact on the environment. Assess resource
consumption, waste generation, carbon emissions, and any practices that could harm
ecosystems. Consider adopting sustainable practices to minimize your environmental footprint.
4. Social Responsibility: Examine how your organization contributes to social well-being. Are you
positively impacting the communities in which you operate? Do you promote diversity and
inclusion within your workforce? Addressing social issues can enhance your reputation and
stakeholder relationships.
5. Long-Term Value Creation: Shift focus from short-term profits to long-term value creation. Are
your strategies and decisions geared towards sustained growth and innovation? Evaluate
investments in research, development, and employee training that contribute to lasting success.

Interpreting performance in light of external considerations and sustainability requires a holistic

perspective that values not only short-term gains but also long-term viability, ethical behavior, and
positive societal impact. By considering these factors, organizations can navigate challenges and
opportunities while contributing to a more sustainable and responsible future.

2. Divisional performance and transfer pricing

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E) Performance Measurement and control

a) Explain and illustrate the basis for setting a transfer price using variable cost, full cost and the
principles behind allowing for intermediate markets.[2]

A transfer price is the price at which goods or services are transferred from one division to another
within the same organisation.

Setting the transfer price

There are two main methods available:

Method 1: Market based approach – (Easy – direct Transfer price will be external market price)

If an external market exists for the transferred goods then the transfer price could be set at the external
market price.

Advantages of this method:

 The transfer price should be deemed to be fair by the managers of the buying and selling
divisions. The selling division will receive the same amount for any internal or external sales. The
buying division will pay the same for goods if they buy them internally or externally.
 The company's performance will not be impacted negatively by the transfer price because the
transfer price is the same as the external market price.

Disadvantages of this method:

 There may not be an external market price.

 The external market price may not be stable. For example, discounts may be offered to certain
customers or for bulk orders.
 Savings may be made from transferring the goods internally. For example, delivery costs will be
saved. These savings should ideally be deducted from the external market price before a transfer
price is set, giving an "adjusted market price".

Method 2: Cost based approach (VVVV.Imp)

The transferring division would supply the goods at cost plus a % profit. A standard cost should be used
rather than the actual cost since:

 Actual costs do not encourage the selling division to control costs.

 If a standard cost is used, the buying division will know the cost in advance and can therefore put
plans in place.

There are a number of different standard costs that could be used:

 Full cost
 Marginal (variable) cost
 Opportunity cost.

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E) Performance Measurement and control

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E) Performance Measurement and control

b) Explain how transfer prices can distort the performance assessment of divisions and decisions
made.[2] - CGT

Transfer pricing refers to the practice of determining the price at which goods, services, or intellectual
property are transferred between divisions or subsidiaries within the same company. While it is a
necessary practice for internal accounting and performance assessment, it can lead to distortions in the
assessment of divisional performance and decision-making. Here's how:

1. Goal Congruence vs. Local Optimization: Divisions might be evaluated based on their own
performance metrics, which can lead to local optimization rather than aligning with the overall
goals of the organization. Divisions may focus on maximizing their own profits rather than
contributing to the company's overall success.
2. Distorted Costs and Revenues: Transfer pricing can artificially inflate or deflate the costs and
revenues of divisions. If a selling division sets a high transfer price, the purchasing division's costs
increase, impacting its profitability. Conversely, a low transfer price can distort the selling
division's performance positively.
3. Incentives for Overproduction or Underproduction: Incorrectly set transfer prices can create
incentives for overproduction or underproduction. Divisions that receive products at a low
transfer price might overproduce to increase their apparent profitability, leading to excessive
inventory. Conversely, high transfer prices might discourage purchasing divisions from acquiring
necessary resources.
4. Suboptimal Decision-Making: Managers might make decisions based on transfer pricing
considerations rather than what's best for the company as a whole. For example, a division
might choose to outsource a component instead of producing it internally, simply because the
internal transfer price makes outsourcing appear cheaper.
5. Competition vs. Collaboration: Transfer pricing can foster unhealthy competition among
divisions rather than collaboration. Divisions might be less willing to share resources,
information, or expertise if they fear it will negatively impact their individual performance
metrics.
6. Lack of Market Realism: Market conditions might not always match internal transfer prices.
Divisions might be operating in different competitive landscapes, and internal transfer prices
might not reflect external market realities.
7. Incentive for Cost Manipulation: Divisions might manipulate their cost structures to influence
the transfer price and their apparent profitability. This can compromise the accuracy and
integrity of performance assessments.

To mitigate these distortions, organizations should establish transparent and well-justified transfer
pricing policies. These policies should consider both divisional autonomy and the overall objectives of
the company. Regular reviews, clear communication, and alignment of incentives with organizational
goals can help balance divisional autonomy with the need for accurate performance assessment and
decision-making.

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E) Performance Measurement and control

c) Explain the meaning of, and calculate, Return on Investment (ROI) and Residual Income (RI), and
discuss their shortcomings.[2]

I. Return on investment (ROI)

This is a similar measure to ROCE but is used to appraise the investment decisions of an individual
department.

ROI = (Controllable profit/Capital employed) × 100

 Controllable profit is usually taken after depreciation but before tax. However, in the exam you
may not be given this profit figure and so you should use the profit figure that is closest to this.
Assume the profit is controllable, unless told otherwise.
 Capital employed is total assets less current liabilities or total equity plus long term debt. Use net
assets if capital employed is not given in the question.
 Non-current assets might be valued at cost, net replacement cost or net book value (NBV). The
value of assets employed could be either an average value for the period as a whole or a value as
at the end of the period. An average value for the period is preferable. However, in the exam you
should use whatever figure is given to you.

ROI is a popular measure for divisional performance but has some serious failings which must be
considered when interpreting results.

Advantages

 It is widely used and accepted since it is line with ROCE which is frequently used to assess overall
business performance.
 As a relative measure it enables comparisons to be made with divisions or companies of
different sizes.
 It can be broken down into secondary ratios for more detailed analysis, i.e. profit margin and
asset turnover.

Disadvantages

 It may lead to dysfunctional decision making, e.g. a

division with a current ROI of 30% would not wish
to accept a project offering a ROI of 25%, as this
would dilute its current figure. However, the 25%
ROI may meet or exceed the company's target.
 ROI increases with the age of the asset if NBVs are
used, thus giving managers an incentive to hang on
to possibly inefficient, obsolescent machines.
 It may encourage the manipulation of profit and
capital employed figures to improve results, e.g. in
order to obtain a bonus payment.
 Different accounting policies can confuse
comparisons (e.g. depreciation policy).

Residual income (RI)

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E) Performance Measurement and control

RI = Controllable profit – Notional interest on capital

 Controllable profit is calculated in the same

way as for ROI.
 Notional interest on capital = the capital
employed in the division multiplied by a
notional cost of capital or interest rate.
– Capital employed is calculated in the
same way as for ROI.
– The selected cost of capital could be
the company’s average cost of funds
(cost of capital). However, other
interest rates might be selected, such
as the current cost of borrowing, or a
target ROI. (You should use whatever
rate is given in the exam).

Compared to using ROI as a measure of performance, RI has several advantages and disadvantages:

Advantages

 It encourages investment centre managers to make new investments if they add to RI. A new
investment might add to RI but reduce ROI. In such a situation, measuring performance by RI
would not result in dysfunctional behaviour, i.e. the best decision will be made for the business
as a whole.
 Making a specific charge for interest helps to make investment centre managers more aware of
the cost of the assets under their control.
 Risk can be incorporated by the choice of interest rate used: different interest rates for the
notional cost of capital can be applied to investments with different risk characteristics.

Disadvantages

 It does not facilitate comparisons between divisions since the RI is driven by the size of divisions
and of their investments.
 It is based on accounting measures of profit and capital employed which may be subject to
manipulation, e.g. in order to obtain a bonus payment.

d) Compare divisional performance and recognise the problems of doing so.[2]

I. Comparing Divisional performance -

Divisional performance can be compared in many ways. ROI and RI are common methods but other
methods could be used.

 Variance analysis – is a standard means of monitoring and controlling performance. Care must
be taken in identifying the controllability of, and responsibility for, each variance.
 Ratio analysis – there are several profitability and liquidity measures that can be applied to
divisional performance reports.

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E) Performance Measurement and control

 Other management ratios – this could include measures such as sales per employee or square
foot as well as industry specific ratios such as transport costs per mile, brewing costs per barrel,
overheads per chargeable hour.
 Other information – such as staff turnover, market share, new customers gained, innovative
products or services developed.

II. Problems

3. Specific performance analysis issues in not-for-profit organisations and the public sector

a) Comment on the problems of having non-quantifiable objectives in performance management.[2]

The not-for-profit sector incorporates a diverse range of operations, including national government, local
government, charities, executive agencies, trusts and so on. The critical thing about such operations is
that they are not motivated by a desire to maximise profit.

Many, if not all, of the benefits arising from expenditure by these bodies are non-quantifiable (certainly
not in monetary terms, e.g. social welfare). The same can be true of costs. So any cost/benefit analysis is
necessarily quite judgemental, i.e. social benefits versus social costs as well as financial benefits versus
financial costs. The danger is that if benefits
cannot be quantified, then they might be ignored.

Another problem is that these organisations often

do not generate revenue but simply have a fixed
budget for spending within which they have to
keep (i.e. a capital rationing problem). Value for
money (‘VFM’) is often quoted as an objective
here but it does not get round the problem of
measuring ‘value’.

b) Comment on the problems of having multiple objectives in not-for-profit organisations and the
public sector.[2]

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E) Performance Measurement and control

The primary objective in not-for-profit organisations is not to make money, but to benefit prescribed
groups of people. As with any organisations, NFPs will use a mixture of financial and non-financial
objectives.

Multiple stakeholders in not-for-profit organisations give rise to multiple objectives. As a result, there is a
need to prioritise objectives or to make compromises between objectives. With NFPs the non-financial
objectives are often more important and more complex, because of the following:

 Most key objectives are very difficult to quantify, especially in financial terms e.g. quality of care
given to patients in a hospital
 Multiple and conflicting objectives are more common in NFPs, e.g. quality of patient care versus
the number of patients treated.

c) Explain how performance could be measured in not-for-profit organisations and the public sector.[2]

Not-for-profit organisations may have some non-quantifiable objectives but that fact does not exempt
them from the need to plan and control their activities.

d) Explain Value for Money (VFM) as a public sector objective and how the 3Es can be used to achieve
VFM.[1]

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E) Performance Measurement and control

A common method of assessing public sector performance is to assess value for money (VFM). This
comprises three elements:

 Economy – an input measure. Are the resources used the cheapest possible for the quality
required?
 Efficiency – here we link inputs with outputs. Is the maximum output being achieved from the
resources used?
 Effectiveness – an output measure looking at whether objectives are being met.

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