In recent time, many companies/organisations have starting focusing on non-financial factors which include customer and employee satisfaction, work atmosphere, etc. which are not financial but in long process increase profitability of the organization. Further, right Amalgamation of both financial and non-financial measures can provide key executives with the glimpse of company’s progress well before a financial verdict is made.
This paper concentrates on comparing financial and non-financial metrics used in traditional and lean enterprise. Traditional financial measures were first introduced 1900’s and have been used since then to size financial performance of the organization.
The following are basic financial measures implemented in traditional organization:
Liquidity Metrics:
One of the many reasons organization fail is poor cash management, therefore liquidity management play an important role. Doing so, organization can limit and control cash flow problem and induce profitability. One of the most common liquidity ratio applied is current ratio, which is the ratio of current asset to current liability. Current ratio directs the ability of the organization to pay bills. If the ratio is less than one that means the organization is under liability or debt. The ratio of greater than provides safety cushion to the organization.
Solvency:
For the company to fulfil long term commitments, stay in business and continue making profit require common solvency ratio that is debt-to-asset and debt-to-equity to be one or greater than one. Organizations with too much debt will fail to manage their cash flow if the company’s financial condition deteriorate.
Profitability:
The ability of the organization to convert sales into profits and cash flow. The parameters involved are gross margin, net income margin and operating margin.
Gross margin= gross profit / sales;