Combining Measurement Frameworks

Abstract

This paper reviews and summarizes financial measurement systems and evaluates them against some core management constructs. First, accurate information is fundamental for decision making. Recent improvements in financial control systems and processes offer improvements in the accuracy of the cost and profit data being reported to management. Techniques such as Activity Based Costing (ABC), the Balanced Scorecard, and the Economic Value Added (EVA) concept have improved the accuracy of financial data and given companies that implement them a competitive advantage. Second, the EVA approach can be used to account for the total cost of the capital employed to generate revenues, and provides a metric for measuring the economic value added by corporate operations. Shareholders and the investment community are pressuring managers to deliver value and are demanding more accurate and transparent performance measurement approaches. Combining new and improved performance measurement frameworks may provide synergies that provide even more benefits. The ABC, Balanced Scorecard and EVA techniques are reviewed and evaluated for compatibility to see if they could be used simultaneously in combination, or whether they are mutually exclusive of each other. An analysis of the benefits provided by each technique is persuasive. ABC is a superior method of allocating overhead and indirect costs to products and services so a more accurate evaluation of their profitability can be made. The Balanced Scorecard enables managers to identify and track a number of financial and non-financial metrics to provide an accurate view of operating performance. EVA is an “economic” metric for measuring corporate performance that takes into account the cost of equity on assets employed and helps managers report out accurate valuations of economic profit. Since each technique involves improving the accuracy of information provided to economic decision makers, and can be tailored to a particular project’s critical success factors, the three techniques were found to be complimentary and can be used in combination.