Business Objectives and Strategy: Measures of performance: financial and non-financial — OCR A-Level Business

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Business Objectives and Strategy: Measures of performance: financial and non-financial explained

This topic covers the fundamental functions of a business, including marketing, production, operations management, accounting and finance, as well as customer service, sales, and support services, and evaluates their importance to stakeholders.

What to demonstrate

Identification of key business functions: marketing, production, operations management, accounting and finance, customer service, sales, and support services.
Evaluation of the impact and importance of these functions to various stakeholder groups.
Understanding how these functions interact within a business context.

Business Objectives and Strategy: Measures of performance: financial and non-financial exam tips

Quick Revision Summary (Key Takeaway)

Financial and non-financial measures of performance are used by businesses to assess success. Financial measures include profitability, liquidity, and shareholder returns, while non-financial measures cover customer satisfaction, employee engagement, and environmental impact. A balanced approach is crucial for long-term sustainability.

Topic Overview

In business, performance measurement is essential for evaluating whether objectives are being met. Financial measures focus on monetary outcomes, such as profitability, liquidity, and shareholder value. These are often derived from financial statements and include ratios like gross profit margin, net profit margin, return on capital employed (ROCE), and current ratio. They are crucial for stakeholders like investors and creditors, as they indicate the financial health and efficiency of the business.

However, financial measures alone provide a limited view. Non-financial measures, such as customer satisfaction, employee engagement, environmental impact, and corporate social responsibility (CSR), are increasingly important. They help businesses build a sustainable competitive advantage, enhance reputation, and align with broader stakeholder expectations. For example, high employee morale can lead to better productivity, and strong customer loyalty can drive repeat sales.

In the OCR A-Level Business syllabus, this topic is part of 'Business Objectives and Strategy'. It requires students to understand the strengths and limitations of both types of measures and how they interrelate. A balanced scorecard approach, which combines financial and non-financial metrics, is often used to give a holistic view of performance. This knowledge is vital for analysing business strategy and making informed decisions.

Key Concepts

→Financial measures: profitability ratios (gross profit margin, net profit margin, ROCE), liquidity ratios (current ratio, acid test), and shareholder returns (dividend yield, earnings per share).
→Non-financial measures: customer satisfaction surveys, employee turnover, productivity, environmental impact, and ethical reputation.
→Balanced scorecard: a framework that integrates financial and non-financial measures across four perspectives: financial, customer, internal processes, and learning and growth.
→Limitations of financial measures: they are historical, can be manipulated, and ignore qualitative factors like brand loyalty or employee wellbeing.
→Importance of context: measures must be compared to targets, previous periods, or industry benchmarks to be meaningful.

Marking Points

Identification of key business functions: marketing, production, operations management, accounting and finance, customer service, sales, and support services.
Evaluation of the impact and importance of these functions to various stakeholder groups.
Understanding how these functions interact within a business context.

Examiner Tips

💡Use real-world business examples to illustrate how different functions work together.
💡Always consider the impact on stakeholders when evaluating the importance of a business function.
💡Be prepared to apply knowledge of these functions to the specific business context provided in the Resource Booklet.
💡Always use the correct formula and show your workings in calculation questions. State the formula before substituting numbers.
💡When evaluating performance, use a range of measures, both financial and non-financial, and consider the business's objectives and context.
💡Use the 'Point, Evidence, Explain' structure for essay questions. For 'Evaluate' questions, make a judgement and justify it with evidence.

Common Mistakes

Treating business functions as isolated silos rather than integrated components.
Failing to link the functions to specific stakeholder impacts.
Providing generic descriptions without evaluating the importance of the function to a specific business scenario.
Misconception: Profit is the only measure of business success. Correction: While profit is vital, non-financial measures like customer satisfaction and employee morale are equally important for long-term sustainability.
Misconception: Non-financial measures are less important than financial ones. Correction: They are complementary; non-financial measures can predict future financial performance, e.g., high employee engagement often leads to higher productivity and lower recruitment costs.
Misconception: ROCE and profit margin are the same. Correction: ROCE measures the return on capital invested, while profit margin measures the percentage of revenue that becomes profit. They assess different aspects of performance.

Revision Plan

1Week 1: Learn the definitions and formulas for key financial ratios (gross profit margin, net profit margin, ROCE, current ratio). Practice calculating them from given data.
2Week 1: Understand non-financial measures and their importance. Create a mind map linking each measure to a business objective.
3Week 2: Study the balanced scorecard and how it integrates financial and non-financial measures. Apply it to a case study.
4Week 2: Practise past exam questions, focusing on analysis and evaluation. Use mark schemes to self-assess.
5Week 2: Revise common pitfalls and misconceptions. Create flashcards for key terms and formulas.

Exam Question Types

📋Calculation questions: You may be asked to calculate a ratio (e.g., ROCE) from given figures. Show all workings and interpret the result.
📋Explain questions: Define and explain a financial or non-financial measure, linking it to a business objective.
📋Evaluate questions: Assess the usefulness of financial vs non-financial measures for a specific business scenario. Make a justified judgement.
📋Data response questions: Analyse a set of financial and non-financial data to comment on business performance.

Command Word Expectations (OCR)

Calculate

Show the formula, substitute numbers, and provide the final answer with correct units (e.g., %). No explanation needed unless asked.

Explain

Give a reason or cause. For measures, define the measure and state why it is used, linking to business objectives.

Evaluate

Make a judgement. Consider strengths and limitations of different measures, weigh evidence, and come to a reasoned conclusion.

How Students Lose Marks (Examiner Pitfalls)

Pitfall: Students often confuse financial and non-financial measures, or they fail to link the measures to the business's objectives. They may also list measures without explaining their significance or limitations.

❌ Weak Answer (Loses Marks):Financial measures are profit and revenue. Non-financial measures are customer satisfaction and employee morale.

Example improved answer:Financial measures of performance, such as return on capital employed (ROCE), assess the efficiency and profitability of a business in monetary terms. Non-financial measures, such as customer satisfaction scores or employee turnover rates, evaluate aspects of performance not directly captured in financial statements. Both are essential: financial measures indicate short-term viability, while non-financial measures can signal long-term sustainability and competitive advantage.

Examiner Tip: Always define the measure, give a specific example, and explain its relevance to business objectives. Use correct terminology like 'liquidity', 'gearing', 'productivity', and 'CSR'.

Pitfall: In calculation questions, students often forget to include the formula or misapply it, leading to incorrect ratios. They also fail to interpret the result in the context of the business.

❌ Weak Answer (Loses Marks):ROCE = profit / capital employed. The ROCE is 20%.

Example improved answer:ROCE is calculated as (operating profit / capital employed) × 100. For example, if a business has an operating profit of £50,000 and capital employed of £250,000, ROCE = (£50,000 / £250,000) × 100 = 20%. This means the business generates 20p of profit for every £1 of capital invested, which is above the average return, indicating efficient use of resources.

Examiner Tip: Always show your workings, state the formula, and interpret the result. Compare it to previous years, competitors, or industry averages to add context.

Step-by-Step Worked Solutions

Question: A business has revenue of £500,000, cost of sales of £200,000, and operating expenses of £100,000. It has capital employed of £1,000,000. Calculate the net profit margin and ROCE. Comment on the business's performance.

1.Step 1: Calculate gross profit: Revenue - Cost of sales = £500,000 - £200,000 = £300,000.
2.Step 2: Calculate operating profit: Gross profit - Operating expenses = £300,000 - £100,000 = £200,000.
3.Step 3: Calculate net profit margin: (Operating profit / Revenue) × 100 = (£200,000 / £500,000) × 100 = 40%.
4.Step 4: Calculate ROCE: (Operating profit / Capital employed) × 100 = (£200,000 / £1,000,000) × 100 = 20%.
5.Step 5: Comment: A net profit margin of 40% indicates strong control over costs, while a ROCE of 20% suggests efficient use of capital. However, comparisons with industry benchmarks are needed for a full assessment.

Final Answer: Net profit margin = 40%, ROCE = 20%. The business is performing well, but further analysis is needed.

Question: Explain two non-financial measures of performance a company might use to assess its success in achieving its objective of being an ethical employer.

1.Step 1: Identify a non-financial measure: employee satisfaction surveys.
2.Step 2: Explain how it links to the objective: High satisfaction scores indicate fair treatment and good working conditions, aligning with ethical employment.
3.Step 3: Identify a second measure: staff turnover rate.
4.Step 4: Explain the link: Low turnover suggests employees are content and less likely to leave due to poor treatment, reflecting ethical practices.
5.Step 5: Conclude with the importance of using these measures alongside financial ones.

Final Answer: Employee satisfaction surveys and staff turnover rates are two non-financial measures that can indicate whether the company is meeting its ethical employer objective.

Active Recall Memory Test

What is the formula for ROCE?

Key Fact: ROCE = (Operating profit / Capital employed) × 100

Name three non-financial measures of performance.

Key Fact: Customer satisfaction, employee turnover, environmental impact.

What is the balanced scorecard?

Key Fact: A framework that combines financial and non-financial measures across four perspectives: financial, customer, internal processes, and learning and growth.

Why are financial measures alone insufficient for measuring business performance?

Key Fact: They are historical, ignore qualitative factors, and can be manipulated, so they don't give a complete picture of long-term sustainability.

Frequently Asked Questions

What is the difference between financial and non-financial performance measures?

Financial measures are quantitative and based on monetary values, such as profit, revenue, and return on capital employed. Non-financial measures are qualitative or quantitative but not monetary, such as customer satisfaction, employee engagement, and environmental impact. Financial measures focus on short-term profitability, while non-financial measures often indicate long-term health and stakeholder relationships.

Why do businesses use non-financial measures if they are hard to quantify?

Non-financial measures provide insights into areas that financial measures miss, like customer loyalty, brand reputation, and employee morale. These factors can drive future financial performance. For example, high employee satisfaction reduces turnover costs and improves productivity. Using a balanced approach helps businesses achieve sustainable success.

How do I calculate net profit margin?

Net profit margin is calculated by dividing net profit (profit after all expenses, including tax and interest) by revenue, then multiplying by 100 to get a percentage. For example, if net profit is £20,000 and revenue is £100,000, the net profit margin is 20%. This shows how much of each pound of sales is retained as profit.

What is a good ROCE percentage?

A 'good' ROCE varies by industry, but generally, a ROCE higher than the cost of capital (e.g., 10-15%) is considered good. It indicates the business is generating sufficient returns for investors. Always compare to previous years, competitors, and industry averages for a meaningful assessment.

Can non-financial measures be used in financial reports?

Yes, many companies include non-financial measures in their annual reports, such as environmental impact, employee diversity, and customer satisfaction. This is part of integrated reporting, which provides a broader view of performance to stakeholders. It helps build trust and demonstrates corporate responsibility.

What are the limitations of using financial ratios to measure performance?

Financial ratios are based on historical data, so they may not predict future performance. They can be manipulated by accounting policies, and they ignore non-financial factors like customer satisfaction or employee wellbeing. Also, they don't provide context, so comparisons with industry benchmarks are necessary.

Business Objectives and Strategy: Measures of performance: financial and non-financial explained

What to demonstrate

Business Objectives and Strategy: Measures of performance: financial and non-financial exam tips

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