Management Accounting · Performance measurement - overview

Value for Money and Not-for-Profit Performance

Updated 11 October 2026 · Fact-checked

Value for money means using resources economy (spending less on inputs), efficiency (getting the most output from inputs) and effectiveness (achieving the organisation's objectives). Not-for-profit bodies use these 3Es because profit is not their aim. To solve a question, identify whether it concerns inputs, input-to-output, or output-to-objective.

Understand Value for Money and Not-for-Profit Performance

A business can judge itself by profit. A school, hospital, charity or government department cannot. Its aim is service, not profit. So it needs other ways to show it uses money well. That idea is value for money (VFM).

VFM is judged using the 3Es. Economy is about inputs: buying the right quality of resources at the lowest cost. Efficiency links inputs to outputs: getting the most output from the resources used, or using the least resources for a given output. Effectiveness links outputs to objectives: did the service achieve what it was meant to achieve?

A simple chain helps. Inputs (money, staff, supplies) become outputs (patients treated, lessons taught). Outputs lead to outcomes (people healthier, pupils educated). Economy looks at the cost of inputs. Efficiency looks at the link between inputs and outputs. Effectiveness looks at the link between outputs or outcomes and objectives.

The 3Es can pull against each other. Cheap inputs (economy) may be poor quality and harm results (effectiveness). A very efficient clinic that treats many patients quickly may not cure them. Good VFM needs a balance.

Measuring this is hard in not-for-profit bodies. Objectives are often unclear, several and in conflict. Outcomes are hard to quantify and may appear years later. Many bodies have no competitors or market prices to compare against. Funders, users and staff may each want different things. For these reasons, such bodies use a mix of financial and non-financial indicators, and often compare against targets, past results or similar bodies.

Key formulas to remember

Economy: Economy = spending the least on inputs, for the quality required; Measure with cost per unit of input, e.g. cost per hour of agency staff, or actual input cost compared with budget.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs); Examples: patients treated per nurse hour, cost per patient treated. Say which direction you use.
Effectiveness: Effectiveness = actual outcome or output achieved compared with the objective; Examples: percentage of pupils reaching a target grade, percentage of target beneficiaries reached.
Value for money: VFM = economy + efficiency + effectiveness (the 3Es); Some texts add equity (fairness) as a fourth E. Use it only if the question does.

How to solve Value for Money and Not-for-Profit Performance questions

Use this method for any 3Es or not-for-profit question. Most marks are won by classifying the measure correctly.

1Read the question and note the organisation and its objectives.
2Find what is being measured: an input, an output, or an outcome.
3If it is only about the cost or price of inputs, it is economy.
4If it links outputs to inputs (per hour, per unit of resource, cost per output), it is efficiency.
5If it compares results with the objective or target, it is effectiveness.
6For calculations, compute the ratio, then compare it with a target, last year or another unit.
7State the conclusion in plain words and check whether one E has been gained at the cost of another.
8For discussion questions, mention measurement problems such as unclear objectives, no profit, and hard-to-quantify outcomes.

Quickest way: Input, link or objective

When to use it: Use for classification multiple choice questions where you must label a measure as economy, efficiency or effectiveness.

Ask: does it mention an objective or target result? If yes, effectiveness.
If not, ask: does it relate outputs to inputs? If yes, efficiency.
If it is only about cost or quantity of inputs bought, it is economy.
Check the wording: 'cheaper', 'lower price' means economy; 'more per hour' means efficiency; 'achieved aim' means effectiveness.

Common mistakes in Value for Money and Not-for-Profit Performance

Treating efficiency and effectiveness as the same thing.
Both sound like 'doing well'.
Fix: Efficiency is doing things right (output per input). Effectiveness is doing the right things (meeting objectives).
Calling a lower cost per patient 'economy'.
Cost is mentioned, so students think of economy.
Fix: Cost per patient links cost to output, so it is efficiency. Economy is only the cost of inputs, such as the price paid for drugs.
Assuming cheaper inputs are always better VFM.
Economy is read as 'spend least'.
Fix: Economy means lowest cost for the required quality. Poor quality can harm effectiveness.
Using profit to judge a not-for-profit body.
Profit is the default measure in business questions.
Fix: Use the 3Es, targets and non-financial indicators linked to the body's objectives.
Ignoring the trade-off between the 3Es.
Students treat each E separately.
Fix: Comment on conflicts. Example: faster throughput (efficiency) may reduce quality of care (effectiveness).

Worked examples

Example 1

A hospital treated 4,800 patients last year using 24,000 nurse hours. This year it treated 5,400 patients using 25,200 nurse hours. Calculate patients treated per nurse hour for each year and state which E this measures and whether it has improved.

Show the solution

Last year: 4,800 ÷ 24,000 = 0.20 patients per nurse hour.
This year: 5,400 ÷ 25,200 = 0.2143 patients per nurse hour (about 0.214).
The measure links outputs (patients) to inputs (nurse hours), so it is efficiency.
0.214 is higher than 0.20, so efficiency has improved.

Answer: Efficiency rose from 0.20 to about 0.214 patients per nurse hour, an improvement.

Example 2

A charity aims to place 500 long-term unemployed people into jobs. It spent $150,000 and placed 400 people. Last year it spent $150,000 to place 360. Calculate cost per placement and the percentage of the target met. Comment on efficiency and effectiveness.

Show the solution

Cost per placement this year: $150,000 ÷ 400 = $375.
Cost per placement last year: $150,000 ÷ 360 = $416.67.
Cost per placement links cost to output, so it is efficiency. It fell, so efficiency improved.
Target met this year: 400 ÷ 500 = 80%. Last year: 360 ÷ 500 = 72%.
Comparing results with the objective is effectiveness. It rose from 72% to 80%, but the target was not fully met.

Answer: Cost per placement fell from $416.67 to $375 (more efficient). Effectiveness rose from 72% to 80% of target, still short of the objective.

Exam tips

In objective tests, classify first using the input, link or objective check before reading the options in detail.
If a question asks for a measure of effectiveness, choose one tied to the stated objective, not a cost measure.
Watch for options that mix up efficiency and effectiveness. Two options often differ only in which E they name.
In written-style multi-task questions, give the calculation, name the E, and add one comment on interpretation.
Remember that quality of service often has no price. Expect questions on why not-for-profit measurement is difficult.

Practice questions from Performance measurement - overview

Value for Money and Not-for-Profit Performance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Value for Money and Not-for-Profit Performance: frequently asked questions

What is the difference between efficiency and effectiveness in a not-for-profit organisation?

Efficiency compares outputs with inputs, such as meals served per volunteer hour. Effectiveness compares results with objectives, such as whether hunger in the area fell as intended. A body can be efficient but not effective if it does the wrong things well.

What are the 3Es of value for money?

They are economy, efficiency and effectiveness. Economy is minimising the cost of inputs for the quality needed. Efficiency is maximising output from inputs. Effectiveness is achieving the objectives.

Why is performance hard to measure in not-for-profit organisations?

There is no profit to use as a single measure, and objectives are often several and sometimes conflicting. Outcomes are hard to quantify and may take years to appear. Different stakeholders also want different things.

Which performance measures suit not-for-profit organisations?

Use a mix of the 3Es, comparisons with targets, past results or similar bodies, and non-financial indicators such as waiting times, user satisfaction and quality ratings. Pick measures linked to the body's objectives.