Disadvantages of financial performance indicators

Shahid Musthafa
Mind Map by , created about 6 years ago

Master ACCA F5: Performance Management Mind Map on Disadvantages of financial performance indicators, created by Shahid Musthafa on 10/01/2013.

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Shahid Musthafa
Created by Shahid Musthafa about 6 years ago
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Disadvantages of financial performance indicators
1 Financial performance indicators are calculated to measure the performance of a particular department and the concerned manager associated with that department
1.1 Achievement of KPI's may be linked to reward systems in order to motivate the managers in such a case there are possibilities that managers may falsify the performance indicators in order to be eligible for the discounts
2 Major dis- advantages
2.1 Short termism
2.1.1 Financial performance indicators act as a measure of short term performance
2.1.1.1 Linking rewards based on such PI's may lead to decisions which are intended at improving short term results
2.1.1.1.1 managers may discontinue the decisions that will lead to long term profitability
2.1.1.1.1.1 Cutting down the research and development costs and spending more on marketing of the current product
2.1.1.1.1.2 Purchasing of cheaper thus poor quality materials to cut down present COGM but in turn it may lead to lose of customers in the long run
2.1.2 A combination of both qualitative and quantitative performance measures provides a better indication of how a company may perform in the long run.
2.2 Manipulation of results
2.2.1 Done by the managers to take advantage of the reward programmes
2.2.2 Accelerating the revenue figures
2.2.2.1 in order to improve the revenue figures of the previous year some revenue figures of the current year carried backwards to the previous year
2.2.3 Delaying of Costs
2.2.3.1 Costs included in the current year may be carried forward to falsely improve the profit fighures of current year
2.2.4 Understating a provision or accrual
2.2.5 manipulation of accounting policies
2.2.5.1 The closing inventory figures may be overstated in order to improve the profit figure for the year
2.2.5.1.1 since COGS = Opening Stock + Purchases - Closing Stock
2.3 Do not convey the full picture
2.3.1 Quality / Non financial performance indicators are ignored

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