Disadvantages of financial performance indicators

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

   • 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

   • Short termism
     • Financial performance indicators act as a measure of short term performance
       • Linking rewards based on such PI's may lead to decisions which are intended at improving short term results
         • managers may discontinue the decisions that will lead to long term profitability
           • Cutting down the research and development costs and spending more on marketing of the current product
           • 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
     • A combination of both qualitative and quantitative performance measures provides a better indication of how a company may perform in the long run.
   • Manipulation of results
     • Done by the managers to take advantage of the reward programmes
     • Accelerating the revenue figures
       • in order to improve the revenue figures of the previous year some revenue figures of the current year carried backwards to the previous year
     • Delaying of Costs
       • Costs included in the current year may be carried forward to falsely improve the profit fighures of current year
     • Understating a provision or accrual
     • manipulation of accounting policies
       • The closing inventory figures may be overstated in order to improve the profit figure for the year
         • since COGS = Opening Stock + Purchases - Closing Stock
   • Do not convey the full picture
     • Quality / Non financial performance indicators are ignored