Non-Financial consideration-

Relevance in Decision Making.

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ABSTRACT. This study aimed at analyzing the role of non-financial

considerations in the decision making of Modern Businesses. Study
indicates that non-financial information plays a very important role in the
decision making. It revealed that non-financial information helps managers
in making decisions about market share, quality management, and
environment protection. Based on the study the author concludes that non-
financial information should be part and partial of management decision
making process and such information should also be disclosed in financial
reports by way of notes. In the view of the importance of financial
information in the decision as indicated by various aspects covered in the
paper, coupled with the increased importance of non-financial information,
the author hereby also suggests some important Non-financial
considerations which will help organizations to achieve their objectives
faster.
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Introduction
Over recent years, the level of interest from stakeholders in corporate
environmental, social and ethical performance has risen significantly.
Today non-financial information is as important as financial information
in the decision-making process. Both pieces of information contain
valuable insights that can yield interesting results if used correctly.

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For Instance, financial information is usually the primary factor in a
decision. A proposal that is not financially viable is usually denied
allocation of resources. It is argued that businesses primarily exist to
increase shareholders’ wealth and all other considerations that do not
support this purpose should be ignored.
However, there are also times when a proposal that is not desirable
financially should be accepted because it confers on businesses non-
financial competitive advantages such as increase in employee or
customer satisfaction, community building or reduction in
environmental footprint.

Negligence of non-financial aspects of a decision can negatively impact a

business and this often results in financial consequences for businesses
and thus an important consideration in business decisions.
Attention to financial information alone can create shortsightedness in
companies. The focus on financial aspects may lead to higher profits or
savings in short term, but will cost business in the long run. Non-
financial information, on the other hand, usually helps businesses become
successful over a long term.

For instance, a business that cuts down spending on employee training

saves money in short term, but this will negatively impact the motivation
level of employee and quality of their work, as a result, the business will
lag behind competitors and will see its sales and profitability decline in
long run.

Financial information is easily available. The financial effects of a

decision are often an easy task to determine, while non- financial
implications of a decision are hard to determine. For example, the cost
savings or losses arising from a factory closure can be readily quantified,
but the impact on employees, the community or customers cannot be
quantified.

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Relevance of Non-financial
Information in Decision making.
Non-financial information is often used for policy decision making and
providing information to help in the allocation of resources across
businesses. Users of the non-financial information include Parliament,
government departments, other public bodies, special-interest groups
and members of the public.

While traditional financial measures are relevant to assessing the

performance of businesses, non-financial information is fundamental to
understanding the performance of what are largely for-profit entities,
operating for the private benefit. Non-financial information forms
increasingly important part of investor decision making, relatively little
research has been done to analyze the nonfinancial information currently
available or to determine how investors value specific types of
nonfinancial information.

Nonfinancial performances are measures of performance based on

nonfinancial information. They are becoming increasingly important
both to management and to shareholders and other interested parties
external to an entity. Ratio analysis and other interpretation techniques
on the financial statements cannot measure all aspects of performance.
For example, the effect of a business on the environment cannot be
measured using financial criteria, but is increasingly regarded as an
important aspect for decision making.

One common view is that non-financial information can be coupled with

financial information to deliver insight into organizational management
and inform strategy. The provision of forward looking information
provides greater business intelligence and makes for more informed
decision making. For example, changes in consumer attitudes may well
exist in advance of purchasing decisions and therefore the transactions
that accompany them. Furthermore, the ability to collect and use broader

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and more relevant information underpins the ability to minimize risk by
pre-empting changes occurring in the wider business environment and
acting accordingly. That is, if beliefs or the wider environment change
then redesign of your products or services, and how they are presented,
appears a worthy consideration.

In considering how non-financial information might add value to

internal decision making or reporting, think about what benefits may
arise (i.e. improved stakeholder engagement, performance management)
and the associated costs of collation, interpretation, and risk to
reputation. Once you have a clear understanding of your organization’s
strategy you will be in a stronger position to select what non-financial
information has causal relationships with “Successful” outcomes (and the
avoidance of “Unsuccessful” outcomes).

Non-financial measures can be applied to employees and product/service

quality. One of the many criticisms of traditional accounting
performance measurement systems is that they do not measure the skills
morale and training of the workforce, which can be as valuable to an
organization as tangible assets. For example if employees have not been
trained in the manufacturing practices required to achieve the objectives
of the new manufacturing environment, an organization is unlikely to be
successful.

Employee attitudes and morale can be measured by surveying

employees. Education and skills levels, promotion and training,
absenteeism and labor turnover for the employees for which each
manager is responsible can monitored.

Non-financial information like environment, governance, sustainability,

and social and employee satisfaction affects the decision making
regarding protecting environment, market share and maintenance.
However, they are other factors like government policy, financial
information and inflation which affect the decision making of the
organization.

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Some Important Non-financial Factors
to be considered in Decision making
Process.

Social Considerations:
Decision making is influenced by social cues, but there is little
understanding of how social information interacts with other cues that
determine decisions.

Both faces had the same identity, but one face had a happy expression
and the other had either an angry or a sad expression. Ideal observer
models predict that the facial expressions should not affect the decision-
making process. Results however showed that participants had a prior
disposition to select the happy face when it was paired with the angry
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but not the sad face and over weighted the positive outcomes associated
with happy faces and underweighted positive outcomes associated with
either angry or sad faces. Nevertheless, participants also integrated the
feedback information. As such, their decisions were a composite of social
and utilitarian factors.

Corporate Social Responsibility:

Social responsibility (is the) responsibility of an organization for the
impacts of its decisions and activities on society and the environment
through transparent and ethical behavior that is consistent with
sustainable development and the welfare of society; takes into account
the expectations of stakeholders; is in compliance with applicable law and
consistent with international norms of behavior; and is integrated
throughout the organization.

As CSR issues, become increasingly integrated into modern business

practices, there is a trend towards referring to it as “responsible
competitiveness” or” corporate sustainability.” A key point to note is that
CSR is an evolving concept that currently does not have a universally
accepted definition. Generally, CSR is understood to be the way firms
integrate social, environmental and economic concerns into their values,
culture, decision making, strategy and operations in a transparent and
accountable manner and thereby establish better practices within the
firm, create wealth and improve society.

Environmental Considerations:
Environmental consideration means factual information about and
assessments of:
a) The environment,
b) Factors that affect or may affect the environment including;

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 o projects and activities that are being planned or have been
implemented in the environment

o the properties and contents of products

o factors related to the operation of undertakings, and

o administrative decisions and measures, including individual

decisions, agreements, legislation, plans, strategies and programs, as
well as related analyses, calculations and other assumptions used in
environmental decision-making,

c) Human health, safety and living conditions to the extent that they are
or may be affected by the state of the environment. The environment
means the external environment, including archaeological and
architectural monuments and sites and cultural environments.

Sustainability information
Ongoing sustainability projects have produced a variety of tools and
decision approaches that focus on sustainability metrics and indicators,
or chemical processes.

However, work is needed to systematically support decisions,

development, and management options in emerging fields of interest.
Sustainability requires meeting the needs of the present population
without compromising the ability of future generations to meet their
own needs. To manage the environmental, economic, and social aspects
of sustainability, decision makers will have to make decisions under
highly complex and uncertain conditions. Models, methods, frameworks,
and guidance for sustainability-based decision making are needed.

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Service performance:
A key responsibility of management is to develop and manage programs,
services, and their related resources as efficiently and effectively as
possible and to communicate the results of these efforts to the
stakeholders. Performance measurement when linked to the budget and
strategic planning process can assess accomplishments on an
organization-wide basis. When used in the long-term planning and goal
setting process and linked to the entity's mission, goals, and objectives,
meaningful performance measurements can assist government officials
and citizens in identifying financial and program results, evaluating past
resource decisions, and facilitating qualitative improvements in future
decisions regarding resource allocation and service delivery.

Governance:
According to ESCAP (Economic and Social Commission for Asia and the
Pacific) the concept of "governance" is not new. It is as old as human
civilization. Simply put "governance" means: the process of decision-
making and the process by which decisions are implemented (or not
implemented). Governance can be used in several contexts such as
corporate governance, international governance, national governance
and local. Since governance is the process of decision-making and the
process by which decisions are governance implemented, an analysis of
governance focuses on the formal and informal actors involved in
decision-making and implementing the decisions made and the formal
and informal structures that have been set in place to arrive at and
implement the decision. Government is one of the actors in governance.

Other actors involved in governance vary depending on the level of

government that is under discussion. In rural areas, for example, other
actors may include influential land lords, associations of peasant farmers,
cooperatives, NGOs, research institutes, religious leaders, finance
institutions political parties, the military etc. The situation in urban
areas is much more complex.

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Employee satisfaction:
Participative Decision-Making (PDM) is the extent to which employers
allow or encourage employees to share or participate in organizational
decision-making. The format of PDM could be formal or informal. In
addition, the degree of participation could range from zero to 100% in
different PM stages. PDM is one of many ways in which an organization
can make decisions. The leader must think of the best possible style that
will allow the organization to achieve the best results. According to
psychologist Abraham Maslow, workers need to feel a sense of belonging
to an organization (Maslow's Hierarchy of Needs).

Non-Financial Measures:
Although non-financial measures are increasingly important in decision-
making and performance evaluation, companies should not simply copy
measures used by others. The choice of measures must be linked to
factors such as corporate strategy, value drivers, organizational
objectives and the competitive environment. In addition, companies
should remember that performance measurement choice is a dynamic
process – measures may be appropriate today, but the system needs to
be continually reassessed as strategies and competitive environments
evolve.

Common examples of non-financial measures include:

 Trend in market share

 Number of customers at the year end
 Sales per square foot of floor space (for a retailer)
 Percentage of revenue from new products
 Number of products sold per customer.
 Number of new products being developed at the year end
 Number of instances of environmental spillage per year
 Reduction in CO2 emissions during the year
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  Amount of waste (kg) arising from packaging on each $ 10,000 of
products.
 Employee turn over
 Training time per employee
 Lost time injury frequency rate (relating to employees).

CONCLUSION
Investment Decision is not all about financial factors. There are non-
financial factors that plays significant role in making any meaningful
investment decision.

In fact, most of those non-financial factors act as backbone that will

either make or mare the investment if taken. It is therefore important
for entities to combine both nonfinancial information and financial
information in making decision. As indicated in the study carried out
by, the financial information shows “What is happening” whereas the
nonfinancial information shows “Why it is happening”.

Also from the Investors point of view, in order to make efficient

investment decision, they need information about the performance of
the entity. Reports on the performance of the entity should portray
both the financial and nonfinancial information. The financial
information can be received through the statement of financial position,
statement of profits/loss and comprehensive income, statement of cash
flows, statement of changes in equity and the notes to the accounts.
This financial information should be supplement with the nonfinancial
information regarding the environmental policy, the corporate
responsibility, quality management, customer satisfaction, employee
satisfaction and government policies.

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