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The effective organisation

All organisations measure financial performance. The techniques for doing so, the profit and loss account and the balance sheet, are universally used, and the way they are used around the world is pretty well identical. This provides, especially in the business world, a shared and mutually understood set of criteria. In most countries this information must be published as a condition of continuing to be registered company.

It is the ubiquitous use of financial measuring systems which in part fuels the argument as to whether the primary purpose of the business is to serve the customer or make money for the owners. Wherever you stand in this argument, it is an incontrovertible fact that if adequate financial measures are not in position, organisations rarely survives. This is true for businesses and not-for-profit organisations.

While every organisation must have proper financial systems, it is as well to look at some of the limitations and dangers of using these measures alone as indicators of performance.

Most financial measurement systems reflect a snapshot of the way the organisation looks financially on a given day. Put the current snapshot together with earlier ones, and you get a history of the organisation's performance. This history will enable you to infer something about the organisation's future, but it will not really provide reliable basis for prediction. Organisations succeed or fail because of the success of the strategies they are pursuing, and the financial measurements tell you nothing of the strategy (though annual reports of the companies often do). More importantly in the environment of rapid change in which organisations now operate, historical performance is a decreasingly reliable base on which to judge potential.

An organisation which is driven, as most large western public companies are, by the need to attract investors and satisfy shareholders needs to make itself look attractive on those occasions when it reports to them. This can lead to short-term thinking, to cosmetic (though quite honest) action being taken in order that all these important points of contact with the shareholders show the organisation in the best possible light. Short termism is often adduced as a major reason for failure of organisations.

Financial measurement systems favour tangible assets because they are capable of having a value put upon them. Intangible assets like the competence of the staff or the robustness of the strategy are not capable of being valued, indeed there is no place for them in a balance sheet. This can lead organisations to favour the acquisition of the tangible, rather than make the necessary investements in intangibles like training.

Excerpts from The University of Leicester Diploma in Management Resource Development International (RDI) Jamaica.

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