Clearly state what constitutes performance indicators? Why do people want organisations to produce these? Suggest your own type of performance indicators that Could be used with a doctor's surgery (general practise).

Authors Avatar

ACCOUNTING AND CONTROL IN ORGANISATIONS 2003

Q. a) Clearly state what constitutes performance indicators?

b) Why do people want organisations to produce these?

c) Suggest your own type of performance indicators that

Could be used with a doctor’s surgery (general practise).

d) What problems might arise when you try to use the

Performance indicators that you produced in part c).

  1. The purpose of performance indicators is to evaluate and monitor how well a system responsible for providing a service is performing; to report this information in quantitative terms; and to direct the system’s efforts and resources towards desirable goals. The fundamental problem, however, with defining what such a set of performance indicators should be made of due to there sometimes being a lack of consensus on what are desirable goals and, therefore, a lack of definition of what constitutes good performance. Performance indicators can consequently be measuring very different aspects of performance, yet they are all generally concerned with measuring the success of a venture and the success of the people who are managing it.

As performance indicators are concerned with the measurement of the success of an organisation, and its management, you need to look at what success is to see what constitutes one. The obvious answer is that success is earning a profit and that the greater the profit the larger the success. Profit as measured in accordance with generally accepted accounting principles is, however, a somewhat unsure gauge of success. This is because profits can be kept up for years while a business is being milked dry by cutting down on research, maintenance and certain kinds of advertising, or by realising assets which have been steadily appreciating in value. Alternatively profits can be kept down by stepping up these expenditures and by declining to realise assets which have appreciated in value. Furthermore, what does “the larger profit” actually mean. If it simply means the greatest number of absolute pounds, then there is the criticism that a manager who has access to unlimited capital, with either a free rate of interest or a very low rate, can probably increase the absolute profit he shows by pumping in more capital, so long as he can show any return at all on it. If, however, it is measured by the rate of return on capital employed then is a high rate of return on a small capital better or worse than a lower but still satisfactory return on a larger capital.

The fact is that, to find out whether an organisation is more successful than another you need to take into account the cost of capital. You therefore need to look at the excess of net earnings over the cost of capital as the measure of managerial success, also known as residual income. The reason for preferring to maximise residual income rather than to maximise the rate of return is that the latter may make a manager unwilling to expand investment in the enterprise if it will lower the average rate of return, even though the incremental return is still in excess of cost. If we were dealing with a situation in which the manager were given a specific amount of capital to use, then it would be satisfactory to require him to maximise the rate of return on the capital entrusted to him, for this would require him to maximise his absolute dollar return as well.  

Join now!

Instead of telling a manager to maximise something, it is more usual to set a standard or goal. A manager is set a target and his performance is judged by his success in achieving or bettering this figure. This figure is a performance indicator and is used to show how successful managers and organisations are performing. For this figure to be of any use it needs to be comparable to a budget of some sort or a competitor’s figure. This is so that organisations have something to benchmark their performance against and so that they can analyse their performance ...

This is a preview of the whole essay