Financial Reporting · Not-for-profit and public sector entities

Performance Measurement: Value for Money and the Three Es

Updated 11 October 2026 · Fact-checked

Value for money means getting the best result from the resources used. You judge it with three Es. **Economy** is spending less on inputs for the right quality. **Efficiency** is getting the most output from inputs. **Effectiveness** is whether outputs achieve the entity's objectives. Profit is a poor measure because these bodies do not exist to make it.

Understand Performance Measurement: Value for Money and the Three Es

Most businesses can be judged on profit. A hospital, school, charity or council cannot. Their purpose is to provide a service, not to earn a return for owners. Profit tells you little about whether they did their job well.

So performance is judged on value for money (VFM): did the entity use its resources well to achieve its aims? VFM is split into three Es, which follow the chain of resources into results.

Economy: acquiring inputs of the right quality at the lowest cost. Think of buying supplies, hiring staff or paying for premises. It is about the price of inputs.
Efficiency: the relationship between inputs and outputs. You get more output from the same input, or the same output from less input. It is about how well resources are converted.
Effectiveness: whether the outputs achieve the intended outcomes and objectives. It is about results, not cost.

The three can conflict. A hospital could buy the cheapest equipment (economic) that breaks often and harms care (ineffective). A school could cut class costs per pupil (efficient) while exam results fall (ineffective). A good answer shows you see these trade-offs.

There are also practical difficulties. Objectives are often vague, multiple and disputed by different stakeholders. Outcomes are hard to quantify and may appear years later. Quality is hard to measure, and outside factors can affect results. Comparing entities is hard because their circumstances differ. For this reason, non-financial indicators and targets are used alongside financial figures. Some also add a fourth E, equity (fair access to services), but the exam focus is the three Es.

Key rules to remember

Economy: Economy = spending less on inputs, for the same quality; Compare actual input cost with budget or with a benchmark price. Measure of input cost only.
Efficiency: Efficiency = outputs ÷ inputs (or inputs ÷ outputs); Example: patients treated per nurse, or cost per patient treated. State clearly which way round you use.
Effectiveness: Effectiveness = actual outcome achieved compared with the objective or target; Example: percentage of pupils reaching a target grade. Needs a stated objective to judge against.
Value for money: VFM = economy + efficiency + effectiveness (together); Strong VFM needs all three. Good performance on one does not guarantee the others.

How to solve Performance Measurement: Value for Money and the Three Es questions

Use this method for any question asking you to assess or suggest ways of measuring a public sector or not-for-profit entity's performance.

1Identify the entity and its objectives. State what it is trying to achieve, since effectiveness depends on this.
2Identify the inputs (money, staff, supplies), the outputs (services delivered) and the outcomes (the real benefit to users).
3Assess economy by looking at input costs and quality compared with budget or benchmark.
4Assess efficiency by calculating a ratio of outputs to inputs, such as cost per unit of service, and compare it with a prior year or similar entity.
5Assess effectiveness by comparing outcomes with the stated objectives or targets.
6Link the three Es and note any conflict, for example low cost harming quality.
7Comment on limitations: vague objectives, hard-to-measure outcomes, and why profit is not a suitable measure.
8Give a conclusion or recommendation that answers the exact requirement.

Quickest way: Input, output, outcome test

When to use it: Use for objective test questions asking which E a statement or example illustrates.

Ask: is it about the price paid for inputs? That is economy.
Ask: is it about how much output came from the inputs? That is efficiency.
Ask: is it about whether the aim or objective was achieved? That is effectiveness.
If a statement mentions cost per unit or output per hour, choose efficiency.
If it mentions targets met or user outcomes, choose effectiveness.
Check the wording once more for the words cheaper, more per, or achieved.

Common mistakes in Performance Measurement: Value for Money and the Three Es

Treating economy and efficiency as the same thing.
Both sound like saving money.
Fix: Economy concerns the cost of inputs bought. Efficiency concerns output produced from inputs used. Buying cheaper paper is economy; printing more pages per hour is efficiency.
Saying low cost means good value for money.
Students focus only on spending.
Fix: Always test effectiveness too. Cheap services that fail to meet objectives are poor value.
Using profit or return on capital as the main measure.
Habit from commercial entity analysis.
Fix: Explain that profit is not the objective and use VFM and non-financial indicators instead.
Judging effectiveness with no objective stated.
Students skip the first step.
Fix: Start by naming the objective or target, then compare the outcome with it.
Giving a list of measures with no link to the scenario.
Memorised answers are written generally.
Fix: Use figures and details from the scenario, such as cost per patient or exam pass rate.
Ignoring limitations of measurement.
Students think the question only asks for the measures.
Fix: Add a short comment on vague objectives, difficulty measuring outcomes, and differences between entities.

Worked examples

Example 1

A public library service spent ₹40,00,000 last year and lent 2,00,000 books. This year it spent ₹38,00,000 and lent 2,09,000 books. The paper and equipment it buys cost the same prices as last year. Calculate the cost per book lent for each year and comment on efficiency.

Show the solution

Last year cost per book = ₹40,00,000 ÷ 2,00,000 = ₹20.00.
This year cost per book = ₹38,00,000 ÷ 2,09,000 = ₹18.18 (rounded to two decimals).
Fall in cost per book = ₹20.00 − ₹18.18 = ₹1.82, about 9.1% lower (1.82 ÷ 20).
Output rose by 9,000 books (4.5%) while spending fell by ₹2,00,000 (5%).
Efficiency has improved because more output came from fewer inputs.
Input prices were unchanged, so this is not an economy gain. Whether the service is effective depends on whether lending meets its aims, which this data does not show.

Answer: Cost per book fell from ₹20.00 to about ₹18.18, so efficiency improved. This is not evidence of economy because input prices did not change, and effectiveness cannot be judged without objectives such as reach or user satisfaction.

Example 2

A charity's aim is to reduce homelessness. It switched to a cheaper supplier of hostel bedding, saving 10% on bedding costs with equal quality. It also placed 300 people in permanent housing against a target of 500. Identify which of the three Es each fact relates to and conclude.

Show the solution

The cheaper bedding at equal quality is a lower input cost: this is economy.
The saving of 10% shows good economy, since quality did not fall.
Placing 300 people against a target of 500 compares the outcome with the objective: this is effectiveness.
Achievement is 300 ÷ 500 = 60% of target, so effectiveness is weak.
No input-to-output data is given, so efficiency cannot be assessed.
Conclusion: economy is good, but the charity has not met its main objective, so overall value for money is not demonstrated.

Answer: The bedding saving shows economy. Reaching 60% of the housing target shows limited effectiveness. Efficiency cannot be judged without input and output data, so value for money is not proven despite the saving.

Exam tips

In objective tests, decide whether the statement is about input price, output per input, or achieving objectives. That settles the E.
In written answers, use scenario figures. Calculate a cost per unit or percentage of target, then comment.
Always mention that profit is an unsuitable measure and say why, in one or two sentences.
Show you understand conflict between the Es, such as cutting costs lowering quality.
If data is missing for one E, say so rather than guessing.

Practice questions from Not-for-profit and public sector entities

Performance Measurement: Value for Money and the Three Es in other exams

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

Performance Measurement: Value for Money and the Three Es: frequently asked questions

What are the three Es of value for money?

They are economy, efficiency and effectiveness. Economy is about the cost of inputs, efficiency is about output from inputs, and effectiveness is about achieving objectives. Together they show whether resources were used well.

What is the difference between economy and efficiency in the public sector?

Economy is buying inputs of the right quality at the lowest cost. Efficiency is how much output you get from the inputs used. An entity can buy cheaply yet use inputs wastefully, so the two can differ.

Why is profit not used to measure not-for-profit performance?

These entities exist to provide services, not to make a return for owners. Profit would not show whether objectives were achieved or users benefited. Surpluses may even be unwanted if they mean services were not delivered.

How do you measure the performance of a not-for-profit organisation?

Use financial and non-financial indicators linked to its objectives. Examples are cost per unit of service, targets met and user satisfaction. Compare with prior years, targets or similar bodies, and note the limits of the data.