Advanced Performance Management · Financial performance measurement

Public Sector and Not-for-Profit Financial Measures in APM

Updated 11 October 2026 · Fact-checked

Public sector and not-for-profit bodies cannot rely on profit. They are judged on value for money: economy (low cost of inputs), efficiency (best output per input) and effectiveness (outputs achieving objectives). In APM, you calculate the measures, then judge them against objectives, funding limits and stakeholder needs.

Understand Public Sector and Not-for-Profit Financial Measures

A company can use profit as its main score. A charity, school, hospital or government department cannot. Its aim is to deliver a service or mission, not to make a return for owners. Profit tells you little about whether it did its job.

So these bodies are judged on value for money (VFM). VFM asks whether the body used its scarce funds well. It is usually broken into the three Es: economy, efficiency and effectiveness. Some frameworks add a fourth E, equity, meaning fair access to the service. Treat it as an extra point if the scenario raises fairness.

Economy is about the cost of inputs. Did you buy staff, supplies and premises at the lowest cost for the right quality? Efficiency is the link between inputs and outputs. Did you get the most output from the resources used, or use the least resources for a given output? Effectiveness is the link between outputs and the objectives. Did the service achieve what it was set up to achieve?

The three Es can conflict. Cheap inputs may be poor quality, which hurts effectiveness. A very efficient clinic that rushes patients may not improve health. A good answer always looks at all three together.

Financial constraints add pressure. Funding is often fixed by a grant, donations or a government budget. Money may be restricted to specific uses. The body cannot raise prices freely or borrow easily. Costs are easy to measure but outcomes are not, so managers may focus on cost cutting. Many stakeholders (funders, service users, staff, regulators) want different things, and there is no single bottom line to settle them.

Key rules to remember

Economy: Economy = actual cost of inputs compared with planned or benchmark cost of inputs (for the required quality); Measures spending only. Use a cost per unit of input, such as cost per nurse hour or price per kg of supplies. Lower is better only if quality is held.
Efficiency: Efficiency = outputs ÷ inputs (or cost per unit of output = total cost ÷ outputs); Outputs are the activity done, such as patients treated or students taught. Compare with budget, prior periods or similar bodies.
Effectiveness: Effectiveness = extent to which outputs achieve the stated objectives or outcomes; Often a percentage of target achieved, such as % of patients recovered or pass rate. Needs a clear objective to measure against.
Value for money: VFM = economy + efficiency + effectiveness, assessed together; Not a single number. Judge the balance and trade-offs.

How to solve Public Sector and Not-for-Profit Financial Measures questions

Use this method for any question on measuring a public sector or not-for-profit body.

1Identify the body's mission and its objectives. Note who funds it and who uses it.
2Sort each given figure into input, output or outcome. This stops you mixing up the Es.
3Calculate the relevant measures: cost per unit of input for economy, output per input or cost per output for efficiency, and results against objectives for effectiveness.
4Compare each result with something: budget, last year, target or a similar body. A figure alone means little.
5Interpret each E in the context of the scenario. Say what the number suggests and what might explain it.
6Point out links and conflicts between the Es, such as cost cutting that harms quality or outcomes.
7Consider financial constraints and stakeholders: fixed funding, restricted funds, and differing stakeholder aims.
8Give a clear conclusion or recommendation, including better non-financial measures if needed.

Quickest way: Input, output, outcome sort

When to use it: Use when data is given in a table and you have limited time.

Write I, O or OC beside each figure: input, output or outcome.
Economy is about I only. Efficiency is O against I. Effectiveness is OC against objective.
Calculate one ratio per E and compare each with a benchmark.
Write one sentence per E: figure, comparison, reason.
Finish with one line on trade-offs and one on funding limits.

Common mistakes in Public Sector and Not-for-Profit Financial Measures

Confusing economy with efficiency.
Both sound like saving money.
Fix: Economy is the price paid for inputs. Efficiency is how much output you get from those inputs. Label each figure first.
Treating effectiveness as the same as output volume.
Output numbers such as patients treated are easy to find.
Fix: Effectiveness needs the objective. Ask whether the outputs achieved the intended result, such as improved health.
Saying lower cost always means better performance.
Students carry over a profit mindset.
Fix: Check quality and outcomes. Low cost with poor results is weak value for money.
Calculating ratios but not commenting on them.
Students run short of time and see the calculation as the answer.
Fix: Add a comparison and a reason for every figure. Commentary earns the analysis and judgement marks.
Ignoring financial constraints and stakeholders.
The three Es feel like a complete answer.
Fix: Mention fixed funding, restricted funds and competing stakeholder aims whenever the scenario gives them.
Using only financial measures.
The topic sits in a financial measurement chapter.
Fix: Say that outcomes are often non-financial, and suggest measures such as waiting times, satisfaction or pass rates.

Worked examples

Example 1

A charity runs a training programme. Last year it paid ₹6,00,000 for 4,000 trainer hours and trained 200 people. This year it paid ₹6,48,000 for 4,320 trainer hours and trained 240 people. Of those trained this year, 168 found jobs within six months. The objective is job placement. Calculate and comment on economy, efficiency and effectiveness.

Show the solution

Economy: cost per trainer hour last year = ₹6,00,000 ÷ 4,000 = ₹150. This year = ₹6,48,000 ÷ 4,320 = ₹150. Input cost is unchanged, so there is no change in economy.
Efficiency: people trained per 100 trainer hours last year = 200 ÷ 4,000 × 100 = 5. This year = 240 ÷ 4,320 × 100 = 5.56 (to 2 decimal places). Output per input has improved.
Cost per person trained: last year ₹6,00,000 ÷ 200 = ₹3,000. This year ₹6,48,000 ÷ 240 = ₹2,700. Cost per output has fallen by ₹300, or 10%.
Effectiveness: job placement rate this year = 168 ÷ 240 = 70%. No prior year placement rate is given, so improvement cannot be judged.
Comment: the charity buys trainer time at the same price but gets more trainees per hour. Larger groups could reduce quality, so the placement rate must be tracked against last year before calling it better value for money.

Answer: Economy is unchanged at ₹150 per trainer hour. Efficiency improved: 5.56 trainees per 100 hours against 5, and cost per trainee fell from ₹3,000 to ₹2,700. Effectiveness is a 70% job placement rate, but it needs last year's rate to judge the trend.

Example 2

A public hospital has a fixed annual grant. It wants to show value for money for its surgical ward. Budget: 2,000 operations at ₹40,000 each. Actual: 2,100 operations at a total cost of ₹8,19,00,000. Of the operations, 1,890 were successful. The target success rate is 95%. Assess performance and comment on the constraints.

Show the solution

Budgeted total cost = 2,000 × ₹40,000 = ₹8,00,00,000.
Actual cost per operation = ₹8,19,00,000 ÷ 2,100 = ₹39,000. This is ₹1,000 below the budgeted ₹40,000, or 2.5% lower.
Efficiency: more operations (2,100 against 2,000) at a lower unit cost. Total spend is ₹19,00,000 over budget, yet cost per output is better.
Effectiveness: success rate = 1,890 ÷ 2,100 = 90%. This is below the 95% target by 5 percentage points.
Economy: input prices are not given, so economy cannot be assessed. Lower unit cost could come from cheaper inputs or better use of inputs.
Constraints: the grant is fixed, so the ₹19,00,000 overspend must be funded elsewhere or cut next period. Pushing volume may have harmed success rates.

Answer: Efficiency is good: cost per operation is ₹39,000 against ₹40,000 budgeted, with 5% more operations. Effectiveness is weak: the 90% success rate misses the 95% target. Overall value for money is questionable, and the overspend against a fixed grant is a concern.

Exam tips

Always state which E each figure supports before you calculate. It shows structure and earns marks quickly.
If a figure is missing, say which E you cannot assess and what data you would need. This shows professional scepticism.
Link your commentary to the scenario: name the stakeholders, the funding source and the mission.
Recommend measures beyond cost, such as outcome measures and quality indicators, and warn about gaming of targets.
Keep a short closing judgement: is value for money good overall, and what trade-offs exist?

Practice questions from Financial performance measurement

Public Sector and Not-for-Profit Financial Measures in other exams

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

Public Sector and Not-for-Profit Financial Measures: frequently asked questions

What are the three Es in APM?

They are economy, efficiency and effectiveness. Economy is about the cost of inputs, efficiency is output per unit of input, and effectiveness is whether outputs achieve the objectives. Together they assess value for money.

How is efficiency different from effectiveness?

Efficiency looks at how well inputs are turned into outputs. Effectiveness looks at whether those outputs deliver the intended results. A body can be efficient but not effective if it does the wrong things well.

How do you measure performance in a charity?

Start with its mission and objectives, then use the three Es with financial and non-financial measures. Compare against targets, prior years and similar bodies. Also consider donor restrictions, fixed funding and the needs of different stakeholders.

Why is profit not a good measure for public sector bodies?

Their aim is to provide a service, not to earn a return. Prices may be zero or set by government. A profit figure would not show whether the service met needs or used funds well.