Financial Measurement Limitations
Let's take a look at some criticisms against the use of financial measures:
- Not consistent with today's business realities. Today's organizational value-creating activities are not fully captured in the tangible, fixed assets of the firm. Instead, value rests in the ideas of people, in customer and supplier relationships, in databases of key information, and cultures of innovation and quality. Traditional financial measures were designed to compare previous periods based on internal standards of performance.
- Driving by rearview mirror. Financial measures provide an excellent review of past performance and events in the organization. This detailed financial view has no predictive power for the future.
- Tend to reinforce functional silos. Today teams comprised of many functional areas coming together to solve pressing problems and create value in never imagined ways. Our traditional financial measurement systems have no way to calculate the true value or cost of these relationships.
- Sacrifice long-term thinking. Cost reduction efforts often targeted the long-term value-creating activities of the firm such as research and development, associate development, and customer relationship management. This focus on short-term gains at the expense of long-term value creation may lead to suboptimization of the organization's resources.
- Financial measures are not relevant to many levels of the organization. When we roll up financial statements throughout the organization, we are compiling information at a higher level and it is almost unrecognizable and useless in decision making of most managers and employees. Employees at all levels of the organization need performance data they can act on. This information must be imbued with relevance for their day-to-day activities.
Financial statements will remain an important tool for organizations since they ultimately determine whether improvements in customer satisfaction, quality, on-time delivery, and innovation are leading to improved financial performance and wealth creation for shareholders. What we need is a method of balancing the accuracy and integrity of our financial measures with the drivers of future financial performance of the organization.