Financial Management · Financial and other objectives in not-for-profit organisations

Value for Money: Economy, Efficiency and Effectiveness

Updated 11 October 2026 · Fact-checked

Value for money (VFM) means using resources well to achieve an organisation's aims. It is judged by the three Es. Economy is spending less on inputs. Efficiency is getting more output from each input. Effectiveness is whether outputs achieve the objectives. To answer, link each E to a measure and a result.

Understand Value for Money: Economy, Efficiency and Effectiveness

Profit-making companies have a clear scorecard: profit and shareholder wealth. Not-for-profit (NFP) organisations and public sector bodies, such as charities, hospitals and schools, do not. Their aim is a service or a social outcome. So you need another way to judge whether money is being used well. That is value for money.

Value for money is judged using three linked ideas, the 3Es. Picture a process: inputs (money, staff, buildings) are turned into outputs (patients treated, students taught) which are meant to produce outcomes (better health, better exam results).

Economy looks at inputs. Are you buying the resources of the right quality at the lowest cost? Efficiency looks at the link between inputs and outputs. Are you getting the most output for the inputs used, or using the fewest inputs for the output? Effectiveness looks at outputs and outcomes against objectives. Did the service achieve what it was set up to do?

The three can conflict. A hospital can cut costs by hiring cheaper, less experienced staff (more economic), but treatment quality may fall (less effective). A service can be very efficient at doing the wrong thing. That is why you should never judge on one E alone. Good VFM needs all three together.

Measurement is the hard part. NFPs often have several objectives, outputs that are hard to value, and outcomes that take years to show. Often the measures are non-financial, such as cost per pupil, waiting times or the percentage of aims met. Expect FM to ask you to classify a measure and comment on its limits.

Key rules to remember

Economy: Economy = spending less on inputs of a given quality (actual input cost vs budgeted or benchmark input cost); Looks only at input cost. Quality must be held constant, or cheap can mean poor.
Efficiency: Efficiency = output ÷ input (or input ÷ output, such as cost per unit of output); Examples: patients treated per nurse, cost per student. Compare with a target, past period or similar body.
Effectiveness: Effectiveness = outputs or outcomes achieved compared with objectives set; Examples: percentage of target met, exam pass rate, reduction in crime. Needs a clear objective.
Link between the Es: Inputs → (efficiency) → Outputs → (effectiveness) → Outcomes; economy applies to the inputs; Use this chain to place any measure in the right E.

How to solve Value for Money: Economy, Efficiency and Effectiveness questions

Use this method for any question asking you to explain, classify, calculate or comment on VFM in an NFP or public body.

1Identify the organisation and its main objectives. State them in one line, because effectiveness depends on them.
2List the inputs, outputs and outcomes in the scenario. Write them down quickly.
3Classify each measure given: input cost means economy, input-to-output ratio means efficiency, result against objective means effectiveness.
4If a calculation is needed, compute each measure (cost per unit, output per resource, percentage of target achieved) and compare with a target, prior year or benchmark.
5Comment on each E separately, using the numbers. Say whether it is good or poor and why.
6Look for conflicts between the Es, such as lower cost reducing quality.
7Note limits of the measures, such as hard-to-measure outcomes, multiple objectives and quality being ignored.
8Finish with a clear conclusion or recommendation on overall value for money.

Quickest way: Input, output, outcome test

When to use it: Use for objective test questions asking which E a measure shows, or which statement describes a 3E.

Ask: does the measure concern what is paid for resources? If yes, it is economy.
Ask: does it relate output to input, such as per hour, per employee or per pound spent? If yes, it is efficiency.
Ask: does it compare the result with the aim, such as targets met or outcomes achieved? If yes, it is effectiveness.
If two options look right, choose the one that matches the exact words: cost of inputs, ratio of output to input, or achievement of objectives.

Common mistakes in Value for Money: Economy, Efficiency and Effectiveness

Treating economy as the same as cost cutting of everything.
Students think cheaper always means better value.
Fix: Economy is about buying inputs of the right quality at the lowest cost. State that quality must be kept up.
Mixing up efficiency and effectiveness.
Both sound like 'doing well'.
Fix: Efficiency is output per input. Effectiveness is achieving the objective. Doing things right versus doing the right things.
Giving definitions only, with no link to the scenario.
Students memorise the 3Es and stop there.
Fix: Use the scenario's own figures and measures, and say what each shows about that organisation.
Judging VFM on one E only.
One figure, such as cost per patient, is easy to calculate.
Fix: Comment on all three and point out how they may conflict.
Ignoring the objectives when judging effectiveness.
Students assume an NFP has one obvious aim.
Fix: State the objectives first. Effectiveness cannot be judged without them, and there may be several.
Forgetting the limits of VFM measures.
Students treat the numbers as the full picture.
Fix: Mention hard-to-measure outcomes, the time lag, quality being ignored and the risk of managers focusing only on what is measured.

Worked examples

Example 1

A charity runs a food bank. Last year it spent ₹12,00,000 on food and distributed 40,000 meals. This year it spent ₹11,40,000 on food of the same quality and distributed 42,000 meals. Its aim is to feed 50,000 people in need, and this year it fed 42,000. Assess economy, efficiency and effectiveness.

Show the solution

Cost per meal last year: ₹12,00,000 ÷ 40,000 = ₹30.
Cost per meal this year: ₹11,40,000 ÷ 42,000 = ₹27.14 (to two decimal places).
Economy and efficiency: total food spend fell by ₹60,000 for same-quality food while meals rose by 2,000. Cost per meal fell by about 9.5% (2.86 ÷ 30). Strictly, the spend fall suggests economy, and the lower cost per meal shows efficiency in using the spend.
Effectiveness: 42,000 ÷ 50,000 = 84% of the target achieved. Last year's 40,000 was 80% of the same target, if that target applied.
Comment: the charity has improved on all three but still misses its aim by 16%. Quality of food was stated as the same, so the economy gain is genuine.

Answer: Cost per meal fell from ₹30 to about ₹27.14, showing better economy and efficiency. Effectiveness is 84% of target, so the charity is improving but has not met its objective.

Example 2

A public hospital reports: it pays ₹900 per hour for agency nurses against a benchmark of ₹750; each nurse treats 6 patients per shift against a target of 8; and 70% of patients report recovery against a target of 90%. Classify each measure by E and comment.

Show the solution

Agency nurse cost is an input cost, so it measures economy. ₹900 against ₹750 is ₹150 higher, 20% above benchmark (150 ÷ 750). Economy is poor.
Patients per nurse per shift is output per input, so it measures efficiency. 6 against 8 is 75% of target (6 ÷ 8). Efficiency is poor.
Patient recovery rate compares results with the objective, so it measures effectiveness. 70% against 90% means the target is missed by 20 percentage points. Effectiveness is poor.
Link: high input costs and low output per nurse mean resources are being wasted, which probably contributes to weak outcomes. Staffing quality and case mix should be checked before concluding, since sicker patients lower recovery rates and slow throughput.

Answer: Agency cost shows poor economy (20% above benchmark), patients per nurse shows poor efficiency (75% of target), and the recovery rate shows poor effectiveness (70% against 90%). Overall value for money is weak, though case mix may partly explain it.

Exam tips

Always define each E in one short line, then apply it to the scenario. Marks come from application.
In objective questions, match the measure to the E by asking whether it is about inputs, input-to-output, or objectives.
In Section C style answers, use three clear headings, one per E, then add a short conclusion on conflicts and limits.
Give numbers a comparison point: target, last year or benchmark. A figure with no comparison earns little.
When asked about problems of measuring NFP performance, mention multiple objectives, hard-to-quantify outcomes and no profit measure.

Practice questions from Financial and other objectives in not-for-profit organisations

Value for Money: Economy, Efficiency and Effectiveness 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: Economy, Efficiency and Effectiveness: frequently asked questions

What is the difference between economy, efficiency and effectiveness?

Economy is spending less on inputs of the required quality. Efficiency is the amount of output you get from the inputs used. Effectiveness is whether the outputs achieve the organisation's objectives.

How do you measure value for money in a not-for-profit organisation?

Use measures for each E: cost of inputs against a benchmark for economy, cost per unit of output or output per resource for efficiency, and results against targets for effectiveness. Compare with past periods, targets or similar bodies. Add non-financial measures where outcomes cannot be priced.

Can an organisation be efficient but not effective?

Yes. It may produce a lot of output per unit of input but still fail to meet its objectives. For example, a training programme can serve many people cheaply and yet not improve their job prospects.

Are the 3Es only used for NFP organisations?

They are mainly used for NFP and public sector bodies because those lack a profit measure. Commercial firms can also use them, but profit and shareholder wealth are usually the main tests.