## **Learning Outcomes**

After reading this article, you will be able to explain the difference between financial and non-financial performance measures, describe and apply the concepts of economy, efficiency, and effectiveness (the “3Es”), and identify performance metrics relevant to service-sector and not-for-profit organisations. You will also be able to calculate and interpret 3E ratios and recognise appropriate performance indicators in service contexts, as required in the ACCA exam.

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

For ACCA Management Accounting (MA), you are required to understand the importance of both financial and non-financial performance measures, especially in service and public sector environments. Focus your revision on the following syllabus outcomes:

- Explain financial and non-financial measures of performance
- Define and apply the concepts of economy, efficiency, and effectiveness
- Identify and calculate relevant performance ratios (3E ratios)
- Discuss suitable metrics for service-sector and not-for-profit organisations
- Compare the use of financial and non-financial indicators in different types of organisations

## **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. What is the main difference between financial and non-financial performance measures?
2. Match each 'E' with its correct definition:  
   i) Economy  
   ii) Efficiency  
   iii) Effectiveness  
   A. Achieving objectives  
   B. Minimising input costs  
   C. Maximising output for a given input
3. In a public hospital, which of the following is a measure of efficiency?  
   a) Patient waiting times  
   b) Number of patients treated per nurse-hour  
   c) Total donations received
4. Briefly explain why non-financial measures are particularly important in service industries or public sector organisations.

## **Introduction**

Performance measurement is about checking how well an organisation uses its resources to meet its goals. While profit is essential for many businesses, it is not always a useful or available measure in all types of organisations—especially in the public sector and services. Here, performance is often assessed using both financial and non-financial metrics, such as quality, customer satisfaction, and resource utilisation.

This article covers the key financial and non-financial measures, explains the “3Es” of economy, efficiency, and effectiveness, and shows how these apply in the service sector.

## FINANCIAL AND NON-FINANCIAL MEASURES

Performance can be judged using both financial data (quantitative, money-based) and non-financial data (qualitative, operational or behavioural).

> **Key Term: Financial measure**  
> Quantitative metrics derived from accounting information, such as profit, cost per unit, or return on investment.
>
> **Key Term: Non-financial measure**  
> Metrics that capture qualitative or operational aspects, such as customer satisfaction, quality levels, speed, or staff turnover.

### When is each type used?

- **Financial measures**: Appropriate when objectives are profit-based, such as in commercial businesses.
- **Non-financial measures**: Essential where quality, service, or other outcomes are more important, such as public services or charities.

### Importance of non-financial metrics

Non-financial information is critical for:

- Evaluating staff performance and morale
- Monitoring service quality or customer satisfaction
- Tracking process improvements or innovation  
  Financial measures reflect what has happened, but non-financial measures provide leading indicators of future outcomes.

## THE 3Es: ECONOMY, EFFICIENCY, EFFECTIVENESS

The “3Es” are central to appraising resource use and outcomes, especially in non-profit, public, or service environments.

> **Key Term: Economy**  
> Using resources at the lowest possible cost while maintaining required quality.
>
> **Key Term: Efficiency**  
> Producing the maximum output from given inputs, or using minimum inputs for a required output.
>
> **Key Term: Effectiveness**  
> The extent to which outputs achieve the intended objectives or desired outcomes.

### Differences between the 3Es

| Term          | Focus         | Example                                   |
| ------------- | ------------- | ----------------------------------------- |
| Economy       | Inputs        | Sourcing medical supplies at best price   |
| Efficiency    | Process       | Number of patients treated per nurse hour |
| Effectiveness | Outputs/Goals | Percentage of patients fully cured        |

### **Worked Example 1.1**

A city library aims to increase its lending service.

**Scenario:**

- It purchases books in bulk to reduce cost (economy).
- Staff process returns and loans faster (efficiency).
- 85% of users say the library meets their needs (effectiveness).

> **Answer:**  
> The library has achieved economy by controlling input cost, efficiency by speeding up processing, and effectiveness if the service actually satisfies users' needs.

## PERFORMANCE INDICATORS: 3E RATIOS

Performance against the 3Es is often measured using simple ratios:

- **Economy Ratio:**  
  Standard input cost ÷ Actual input cost × 100  
  (A ratio below 100% suggests spending less than standard, but be cautious: quality must not suffer.)

- **Efficiency Ratio:**  
  Actual output ÷ Actual input × 100  
  (Higher percentage = greater efficiency.)

- **Effectiveness Ratio:**  
  Actual output ÷ Planned or standard output × 100  
  (Shows to what extent objectives have been achieved.)

### **Worked Example 1.2**

A health clinic aims to immunise 2,000 children in a month (target).

- Actual immunisations: 1,900
- Standard nurse cost per month: \$8,000
- Actual spend: \$7,500
- Actual nurse hours worked: 600

**Calculate:**

- Economy: \$8,000 ÷ \$7,500 × 100 = 106.7%
- Efficiency: 1,900 ÷ 600 = 3.17 immunisations per hour
- Effectiveness: 1,900 ÷ 2,000 × 100 = 95%

> **Answer:**  
> The clinic spent less than expected (economy), delivered 3.17 immunisations per nurse-hour (efficiency), but achieved only 95% of its target (effectiveness).

## NON-FINANCIAL MEASURES IN SERVICE SECTOR

Service organisations and public bodies focus on both financial control and outcomes such as quality and satisfaction.

### Common non-financial metrics in services

- Customer satisfaction scores
- Waiting times
- Error or defect rates
- Number of complaints
- Staff absenteeism or turnover
- Response times

> **Key Term: Service-sector metric**  
> Quantitative or qualitative indicators used to measure performance in service industries, such as customer wait time or satisfaction level.

### Why are non-financial measures essential here?

- Outputs are often intangible and hard to value in money terms (for example, education or healthcare).
- Stakeholders (such as patients or students) value quality of service, not just efficiency or cost.

### **Worked Example 1.3**

A local bus company tracks the following in addition to revenue:

- Number of trips with on-time arrivals
- Customer satisfaction survey results
- Number of complaints received
- Driver accident rates

> **Answer:**  
> These non-financial metrics help management see if the service is reliable, safe, and valued by users—even if costs are under control.

## PERFORMANCE MEASUREMENT IN NON-PROFIT AND PUBLIC ORGANISATIONS

Traditional financial metrics (like profit) are often not relevant. Instead, value-for-money is judged with the 3Es and suitable non-financial indicators.

| Example: Local council running a waste collection service               |
| ----------------------------------------------------------------------- |
| Economy: Were supplies (vehicles, bins) purchased at competitive rates? |
| Efficiency: Number of households served per truck per day               |
| Effectiveness: Percentage of collection rounds completed on schedule    |

Service targets are often set in terms of coverage, quality, and public satisfaction, rather than profit.

## USING FINANCIAL AND NON-FINANCIAL MEASURES TOGETHER

The best performance measurement systems use both financial and non-financial indicators to give a complete picture of how well objectives are met. For example:

- Customer satisfaction leads to future income (non-financial now, financial later)
- Staff turnover rates may reveal hidden problems before costs rise
- Efficiency ratios highlight where improvements or savings can be made

## **Summary**

Performance must be assessed using a range of indicators. Financial measures alone do not provide the full picture, especially in services and public sector. The 3Es—economy, efficiency, and effectiveness—are central for assessing value for money and outcomes. Non-financial metrics such as service quality, satisfaction, and process reliability are especially important for non-profits and service-industries, allowing management to monitor what matters most to users and society.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain the difference between financial and non-financial performance measures
- Identify and apply the 3Es: economy, efficiency, effectiveness
- Calculate and interpret ratios for each of the 3Es
- Recognise typical service-sector performance metrics
- Understand why non-financial measures are critical in service and public sector settings

## **Key Terms and Concepts**

- Financial measure
- Non-financial measure
- Economy
- Efficiency
- Effectiveness
- Service-sector metric

Financial and non-financial measures - Economy, efficiency, effectiveness; service-sector metrics