Advanced Performance Management · Non-financial performance measurement

Limitations of Financial Performance Measures in ACCA APM

Updated 11 October 2026 · Fact-checked

Financial performance measures report results in money terms. Their main limitations are that they look backward, encourage short-termism, can be manipulated, ignore quality, customers, people and innovation, and say little about strategy. To answer an exam question, name the limitation, apply it to the scenario, then recommend non-financial measures.

Understand Limitations of Financial Performance Measures

Financial measures such as profit, return on investment (ROI), earnings per share and cash flow are essential. Owners, lenders and managers all use them. The problem starts when they are the only measures used to judge performance.

First, they are backward-looking. They report what has already happened. By the time profit falls, the cause (unhappy customers, poor quality, staff leaving) occurred earlier. Financial results are lagging indicators. They do not warn you in advance.

Second, they encourage short-termism. If a manager is judged and paid on annual profit or ROI, cutting training, maintenance, research or marketing lifts this year's result. The damage appears later, and often after the manager has moved on. Managers may also reject positive-NPV projects because they would lower this year's ROI.

Third, they are narrow and open to distortion. Profit depends on accounting policies, depreciation methods, allocation of costs and transfer prices. Managers can manipulate timing of revenue and costs. Financial measures also miss things that create long-term value: customer satisfaction, product quality, employee skills, innovation, brand and reputation. They may not link clearly to strategy, and they can be hard to use at lower levels where staff cannot control costs or revenue.

This is why firms add non-financial measures. These are usually leading indicators, closer to operations, and easier for staff to influence. Examples are on-time delivery, defect rates, customer retention and staff turnover. The best systems balance both, as in the balanced scorecard. Non-financial measures have their own weaknesses (they can be hard to link to profit, can conflict, and can overload managers), so your answer should show balance.

Key rules to remember

Financial measure limitations (memory aid): Backward-looking + Short-term + Narrow + Manipulable + Not linked to strategy; Use this as a checklist, not a formula. Each point must be applied to the scenario.
Return on investment (ROI): ROI = Divisional profit ÷ Capital employed × 100%; Often used to show short-termism: a division may reject an investment whose return is above the cost of capital but below its current ROI.
Leading versus lagging: Financial results = lagging; operational and customer measures = leading; Non-financial measures usually act as leading indicators of future financial results.

How to solve Limitations of Financial Performance Measures questions

Use this method for any question asking you to discuss, criticise or justify a change from financial to non-financial measures.

1Read the requirement. Note whether you must explain limitations, recommend measures, or both.
2Identify what the scenario currently measures and how managers are rewarded.
3List the relevant limitations: backward-looking, short-termist, manipulable, narrow, not linked to strategy, not controllable by staff.
4Apply each limitation to the scenario with a specific fact or figure. Do not give a generic list.
5Suggest suitable non-financial measures linked to the firm's strategy and critical success factors, and say whether each is leading or lagging.
6Give a balanced view: note weaknesses of non-financial measures, such as difficulty of quantifying, conflicting signals or too many measures.
7Conclude with a clear recommendation, such as a balanced set of measures, and show professional skills in tone and judgement.

Quickest way: Limitation, scenario, fix

When to use it: Use when time is short, for a 5 to 10 mark part of a longer question.

Write one line per limitation: name it, then tie it to a scenario fact.
For each limitation, add one non-financial measure that fixes it.
Add one sentence on a drawback of non-financial measures.
Finish with one sentence recommending a balanced mix.

Common mistakes in Limitations of Financial Performance Measures

Writing a generic list of limitations with no link to the scenario.
Students memorise a list and reproduce it.
Fix: Quote a fact from the case for every point. Marks go to application.
Saying financial measures are useless.
Students over-correct when promoting non-financial measures.
Fix: State that financial measures remain necessary and that the aim is balance.
Ignoring drawbacks of non-financial measures.
The question seems one-sided.
Fix: Add a short point: they may be hard to quantify, may not link to profit, and too many cause overload.
Confusing short-termism with backward-looking.
Both relate to timing.
Fix: Backward-looking means results report the past. Short-termism means managers act to boost the current period at the expense of the future.
Suggesting measures that do not fit the strategy.
Students list standard measures from memory.
Fix: Link each measure to a critical success factor in the scenario, such as quality for a premium brand.
Stating a measure without saying what it shows.
Students rush.
Fix: Give the measure, what it indicates and how it links to future financial results.

Worked examples

Example 1

Division A has capital employed of ₹50,00,000 and profit of ₹10,00,000. Its manager is paid a bonus on ROI. A new project needs ₹10,00,000 and would earn ₹1,80,000 a year. The company's cost of capital is 12%. Explain, using figures, one limitation of financial measures shown here.

Show the solution

Current ROI = 10,00,000 ÷ 50,00,000 = 20%.
Project return = 1,80,000 ÷ 10,00,000 = 18%.
The project return of 18% is above the 12% cost of capital, so it adds value to the company.
With the project, profit = 11,80,000 and capital employed = 60,00,000. New ROI = 11,80,000 ÷ 60,00,000 = 19.67%.
ROI falls from 20% to 19.67%, so the manager, judged on ROI, may reject the project.

Answer: ROI encourages short-termism and goal incongruence. The manager may reject an 18% project that beats the 12% cost of capital because divisional ROI would fall from 20% to about 19.7%. This harms shareholders. Using residual income or adding long-term, non-financial measures would reduce the problem.

Example 2

A restaurant chain judges managers only on quarterly profit. Managers have cut staff training and used cheaper ingredients. Profit is up, but online reviews are falling. Explain the limitations of the measure and suggest non-financial measures.

Show the solution

Identify the limitation: quarterly profit is short-term. Cuts to training and ingredient quality raise profit now but harm the future.
Identify the lag: falling reviews will reduce customer numbers later. Profit will not show this until after the damage is done.
Identify narrowness: profit says nothing about service quality, which is critical to success for a restaurant.
Suggest measures: average online review score (customer), repeat-visit rate (customer), food waste and complaints per 1,000 meals (quality), staff turnover and training hours per employee (learning and growth).
Note drawbacks: reviews can be unrepresentative, and the link to profit is not immediate.
Recommend a balanced set with some weight on non-financial measures in the managers' bonus.

Answer: Profit alone is short-termist, backward-looking and silent on quality and customers. The chain should add review scores, repeat visits, complaints, staff turnover and training hours, accepting that these are harder to link directly to profit. A balanced set in managers' reward would reduce short-term cost cutting.

Exam tips

Always apply: a limitation with no scenario link earns little. Quote figures and facts.
In reward scenarios, link the limitation to manager behaviour and goal incongruence.
Show balance. Mention a weakness of non-financial measures in every answer on this topic.
Name measures as leading or lagging where it helps, and tie them to the strategy.
Use professional skills: a clear structure, a reasoned recommendation and a sceptical view of the data.

Practice questions from Non-financial performance measurement

Limitations of Financial Performance Measures in other exams

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

Limitations of Financial Performance Measures: frequently asked questions

What are the main limitations of financial performance measures?

They look backward, encourage short-termism, can be manipulated through accounting choices, and ignore quality, customers, people and innovation. They also may not link to strategy. In the exam, apply each point to the scenario.

What is the difference between financial and non-financial performance measures?

Financial measures are expressed in money, such as profit, ROI and cash flow. Non-financial measures are expressed in other units, such as defect rates, customer satisfaction or staff turnover. Non-financial measures are often leading indicators and are easier for operational staff to influence.

Why use non-financial performance indicators?

They give early warning of future financial results and cover value drivers that profit misses. They also relate more directly to operations and strategy. They should be used alongside financial measures, not instead of them.

Do non-financial measures have limitations too?

Yes. They can be hard to quantify and link to profit, and too many measures cause confusion. They may also conflict with each other. A good answer notes these points and recommends a balanced set.