## **Learning Outcomes**

After reading this article, you will be able to explain how divisional performance is assessed in public sector and non-profit organisations. You will understand the challenges in setting performance measures for non-commercial entities, apply the value for money (VFM) approach using the 3Es (economy, efficiency, effectiveness), and distinguish how financial and non-financial performance is evaluated in these contexts. You should be able to apply these principles to relevant ACCA BT exam questions.

## **ACCA Management Accounting (MA) Syllabus**

For ACCA Management Accounting (MA), you are required to understand how divisional performance measurement applies in the public sector and non-profit organisations, including key challenges and alternative approaches. Focus your revision on the following syllabus elements:

- Differentiate between performance measures for profit-seeking, non-profit, and public sector organisations
- Explain the difficulties in setting objectives and measuring outputs in non-profit entities
- Describe the concepts of economy, efficiency, and effectiveness (the 3Es) in performance evaluation
- Discuss the application and limitations of financial and non-financial indicators in public sector contexts
- Recognise the importance of value for money (VFM) criteria in public sector management

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the 3Es relates to achieving objectives or desired outcomes within a public sector organisation?  
   a) Economy  
   b) Efficiency  
   c) Effectiveness  
   d) Equity

2. State one key challenge in measuring the output or performance of a non-profit entity.

3. What is meant by 'value for money' in the context of public sector performance assessment?

4. Identify one appropriate non-financial performance indicator for a charity.

## **Introduction**

Divisional performance measurement is a core topic for profit-seeking businesses, but public sector and non-profit organisations require different approaches due to their unique missions and outputs. Financial metrics alone are often not suitable. Instead, value for money, service quality, and achievement of objectives become central.

This article explains the main challenges in defining and measuring performance in non-profit and public sector settings. It introduces the value for money framework based on economy, efficiency, and effectiveness, and discusses appropriate indicators beyond profit.

> **Key Term: divisional performance measurement**  
> The process of evaluating the results and operations of distinct segments or responsibility centres within an organisation to assess how well objectives are achieved.

## Divisional Performance in Public Sector and Non-Profits

### How objectives differ from profit-seeking divisions

Profit-oriented divisions aim to maximise return for owners. In public sector and non-profit organisations (such as charities, government agencies, and schools), the main aim may be service delivery, public welfare, or maximising beneficiary outcomes within fixed resources.

> **Key Term: public sector organisation**  
> An entity owned or controlled by government, aiming to deliver services or policy outcomes rather than generate profit.
>
> **Key Term: non-profit organisation**  
> An organisation whose main purpose is not to make a profit, but to pursue objectives such as social benefit, education, or relief of poverty.

### The challenge of performance measurement

Objectives in non-profit settings may be hard to define, variable, or not easily translated into quantifiable outputs. For example, measuring the "success" of a hospital, a museum, or a charity cannot be done with profit metrics alone. Outputs may be social or educational, and often not priced.

> **Key Term: output measurement**  
> The process of quantifying the goods or services delivered by an organisation, which can be challenging when outputs are not physical or easily valued.

### Financial vs. non-financial indicators

In profit-seeking entities, ratios like ROI or residual income are common performance indicators. However, in non-profits, alternative measures must be considered, including service volumes, case numbers, satisfaction surveys, waiting times, or broader societal impact.

## Value for Money (VFM) and the 3Es

### Adopting VFM as the main assessment approach

Public sector organisations are charged with delivering as much useful service as possible from the resources allocated. "Value for money" (VFM) is the principle that the maximum benefit should be obtained from the expenditure of public funds.

> **Key Term: value for money (VFM)**  
> Achieving the best possible outcomes from available resources, balancing cost, quality, and results in public sector and non-profit activities.

### The 3Es: Economy, Efficiency, Effectiveness

Value for money is traditionally assessed using the "3Es" framework: economy, efficiency, and effectiveness.

> **Key Term: economy**  
> Minimising the cost of resources procured or used, while maintaining an acceptable level of quality.
>
> **Key Term: efficiency**  
> The relationship between the inputs used and the outputs produced, typically measured as output per unit input.
>
> **Key Term: effectiveness**  
> The extent to which objectives are achieved or desired outcomes are realised.

#### Summary table: The 3Es in context

| Principle     | Main Question Assessed                   | Example Measure            |
| ------------- | ---------------------------------------- | -------------------------- |
| Economy       | Are resources obtained at least cost?    | Price paid for supplies    |
| Efficiency    | Are resources converted to outputs well? | Patients treated per nurse |
| Effectiveness | Are intended outcomes achieved?          | % students passing exams   |

### **Worked Example 1.1**

**A council runs a public library service with the aim of providing access to education. Explain how the 3Es could be used to assess its performance.**

> **Answer:**
>
> - Economy: Is the library acquiring books and materials at reasonable price?
> - Efficiency: How many users are served per staff member?
> - Effectiveness: Does the library improve reading or learning levels among community members (i.e., are educational goals met)?

## Non-Profit and Public Sector Performance Indicators

### Choosing suitable performance indicators

Financial outcomes are not always appropriate or sufficient in the public and non-profit sectors. Suitable indicators may include:

- Volume of clients served (e.g., number of children receiving vaccinations)
- Timeliness (e.g., average waiting time for a service)
- Service coverage (proportion of total eligible people reached)
- Satisfaction levels (user satisfaction surveys)
- Outcomes (school pass rates, hospital recovery rates)

### Limitations of traditional financial measures

Financial metrics like return on investment (ROI) or residual income (RI) require profit-oriented objectives and revenue figures, which may be missing or irrelevant in non-profit entities. Instead, costs must be analysed in relation to service delivery and outcomes.

> **Key Term: residual income (RI)**  
> The surplus remaining after deducting a notional cost of capital from controllable profit—mainly relevant for profit-seeking investment centres.

### **Worked Example 1.2**

**A charity provides meals to the homeless. What performance indicators could be used to assess its effectiveness?**

> **Answer:**  
> Appropriate indicators might be:
>
> - Number of meals served per day (efficiency)
> - Cost per meal provided (economy)
> - % of beneficiaries reporting improved health or nutrition (effectiveness)

## Problems and Cautions in Non-Profit Performance Measurement

### Difficulties in measuring outputs

Outputs are often intangible, diverse, and only partially under management control. For example, university "output" could include education delivered, research, community engagement, and student development—none of which are easy to quantify.

### Attribution and accountability

Many public sector results depend on external factors (demographics, environmental conditions, policy changes) beyond the direct control of managers. Caution is needed before attributing outcomes solely to divisional or manager performance.

### **Exam Warning**

> Public sector and non-profit measures must always relate back to objectives. Do not assume profit-based indicators are suitable unless the entity has clear commercial operations.

## Approaches to Reporting and Improving Performance

### Combining financial and non-financial information

Effective performance reporting may require a mix of cost analysis, operational measures, and qualitative reporting. In some cases, benchmarking with similar organisations, target setting, and periodic independent reviews are useful.

### The role of stakeholder expectations

Success is assessed, not only by internal standards, but also by the satisfaction of funders, government, beneficiaries, or the public.

### **Worked Example 1.3**

**A state hospital has limited resources and cannot treat every patient immediately. Suggest how both efficiency and effectiveness could be measured and balanced.**

> **Answer:**  
> Efficiency could be measured as the number of patients treated per doctor or per pound spent. Effectiveness would focus on health improvement, such as % of patients who recover, or reduced waiting times. The hospital must balance serving more patients (efficiency) with achieving positive health outcomes (effectiveness).

### Dealing with External Constraints

Performance should always be viewed in light of constraints such as legal mandates, regulatory requirements, and available funding. Not all shortfalls in targets reflect poor management.

## **Summary**

Performance measurement in public sector and non-profit organisations focuses on achieving value for money using the 3Es—economy, efficiency, and effectiveness—rather than just financial returns. Objective setting, output measurement, and combining financial with suitable non-financial indicators are key to meaningful assessment. Challenges include difficulties in output quantification, attribution of responsibility, and dealing with factors outside management control.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The differences between divisional performance measures in profit-seeking and non-profit/public sector entities
- The main difficulties in defining objectives and measuring outputs in non-profit sectors
- The value for money (VFM) approach and the 3Es: economy, efficiency, effectiveness
- Why traditional financial ratios (ROI, RI) are often unsuitable for non-profits
- The importance of non-financial indicators such as service volume, quality, and outcomes
- Typical issues in attributing results and the influence of external constraints

## **Key Terms and Concepts**

- divisional performance measurement
- public sector organisation
- non-profit organisation
- output measurement
- value for money (VFM)
- economy
- efficiency
- effectiveness
- residual income (RI)

Divisional performance and investment measures - Public sector and non-profit performance considerations