What is the problem with using only financial measures of performance? and List four advantages related to decentralization of a firm’s operations.

Please respond to my classmate

Student 1

There are several problems that can occur when only using financial measures of performance. As mentioned in the textbook, management may overinvest or underinvest in projects trying to make themselves look better while ultimately hurting the company’s stakeholders (Jiambalvo, 2020). Management can also focus too much on the ROI of past projects because depreciation has occurred on older equipment which makes the current ROI higher for an older project.

Financial measurements alone cannot determine whether an organization is “healthy” and is being led by a quality management team (What Are Some of the Problems Associated with Using Financial Ratios?, 2020). Making sure that the staff is taken cared of and given an enjoyable work environment helps towards achieving company goals when management feels that they can work to improve the entire organization and not just themselves. Financial measurements give a great explanation of what happened in the past, but those same measurements cannot predict the future and determine the same success as before (Financial Measurement Limitations).

As stated in the textbook, four advantages related to decentralization of a firm’s operations include: better information between top management, faster responses to changing circumstances, decentralized managers are often more motivated, and decentralization helps train management and prepare them to be future executives (Jiambalvo, 2020). The first two advantages mentioned prove that decentralization can majorly increase the efficiency of a firm which strengthens a company’s competitive advantage. The last two advantages of decentralization focuses on the benefits of internal growth which can make a firm more successful in the long term.

Student 2

When strictly relying on financial performance measures, the opportunity to over emphasize positive measurement is possible. Measurements such as profit can be misleading if a firm is spending a high amount on investment; or alternatively, measurements such as return on investment (ROI) can cause managers to underinvest or overinvest against the benefit of the shareholders. Depending on what the preferred financial measurement of performance that a firm relies on, the tendency will always make itself available in the managers of the company, and at times in contradiction to the best interest of the firm.

“Perhaps of even more concern to accountants are the numerous examples in the literature of managers making decision in response to the accounting system, even though the decisions are contrary to the goals of the organization. For instance, a manager who was reluctant to replace equipment, even when it was in the company’s economic interest, because of the heavy book losses which would be unfavorably reflected in his current performance reports,” (Hopwood, 1972). Such is the case when looking at ROI, where a firm would benefit from purchase of new equipment, but the investment would weigh down the liabilities through increased depreciation and thus encourage a manager that is judged on ROI to stick with old equipment.

In response to the four advantages of having a decentralized firm, Jiambalvo (2020) states the following:

1. Better information, leading to superior decisions
2. Faster response to changing circumstances
3. Increased motivation of managers
4. Excellent training for future top-level executives