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Definitions 3 Not For Profit (NFP) Organizations. 3 Profit Organizations.. 3 Efficiency.... 3 Effectiveness.. 3 Possible reasons for a company to be efficient and not effective.. 4

Examples of some measures of performance.. 6 Not for Profit Organizations .. 6 For Profit Organizations . 7 Profit margin ratios........ 7 Return ratios. 8 Problems of absence of profit measures in not for profit organizations . 9 How these problems extend to activities within business entities which have a profit motive ... 11 Public Health Clinic (Quality of care performance measure).. 12 Clinics adherence to appointment times12 Patients ability to contact the clinic and make appointments without difficulty14 A comprehensive patient health monitoring programme..15 Combining the above measures into a single ` quality of care measure.16


Part A The Absence of Profit Measures in Not For Profit (NFP) Organizations causes problems for the measurement of their efficiency and effectiveness. You are required to explain: I. Why the absence of the profit measure should be a cause of the problem referred to. Not for Profit (NFP) Organizations refer to institutions, societies and clubs whose primary purpose is provision of services to members/community, and is not to make profit. Any surpluses are accumulated within the organization and are used in furtherance of the objectives of the organization. Some examples of NFP organizations include Kenya Red Cross, Oxfam, Plan International, Action Aid, among others. Profit Organization refers to a business or other organizations whose primary goal is making money or profit .This differs from a NFP organization which focuses on a goal such as helping the community and is concerned with money only as much as necessary to keep the organization operating. Most companies considered to be business are for profit organizations; this includes anything ranging from retail stores to restaurants to insurance companies to real estate companies. Efficiency Efficiency refers to doing things right. It is concerned with achieving a given result with a minimum use of resources or alternatively, achieving the maximum amount of output from a given level of input resources. It focuses on the relationship between outputs and inputs. Thus efficiency measures imply that we have a means of determining the minimum resources necessary to produce a given effect or the maximum output that should be derived from a given level of resources. Efficiency measures such as standard costing efficiency variances are widely used accounting performance measures. The accuracy and usefulness of such measures is dependent on tasks being well understood and goals being clear and unambiguous. Effectiveness The term effectiveness can be simply defined as `doing the right thing Effectiveness focuses on whether or not the action resulted in the desired goal. It is therefore concerned with the attainment of objectives.

An organization can be efficient but not effective. This can be illustrated by an example of an organization which can use its resources efficiently but fail to achieve its set objectives/goals. Some of the possible reasons for a company to be efficient and not effective includes: Quality issues e.g. compromising quality through use of substandard input. Market constraints e.g. producing high quality products using minimum input but fail to achieve high price due over supply in the market. Government policies. Environmental factors influencing the operation of the firm. Lack of satisfactory service to the customers e.g. provision of service that covers a small percentage of service seekers.

Where there is conflict between efficiency and effectiveness the management should settle for effectiveness, however, it should be noted that both efficiency and effectiveness are important measures of firms performance hence should always be used together. Examples of instances where such conflict could occur includes: Efficiency in processing firms tends to care more about money, time and effects regardless of quality whereas effectiveness focuses on the quality thus result into a conflict. Efficiency seeks conformance to the norm, i.e. it aims at reducing variance whereas effectiveness aims to raise the performance level through change of status quo that is through a step change. This result to destabilizations of the status quo thereby resulting into a conflict between the two.

Therefore, the difference between efficiency and effectiveness is that efficiency measures how well a process is carried out from administrative and organizational point of view whereas effectiveness measures the contribution made by the process towards fulfillment of the objectives or goals of the organization.

In organizations with profit motive, effectiveness can be measured by use of profitability measures such as Return on Investment (ROI) that is total input and output can be measured to facilitate calculation of total profit generated in a given financial year. The output in profit oriented organization can be measured in terms of sales revenue and the outputs represent quality and amount of service offered. Whereas the behaviour of for-profit business is driven mostly by their desire for profits, the behaviour of Not for Profit organizations (NFP) is driven mostly by their mission or community purpose and as such the means to the end may not be necessarily critical. This means the way things are done may not always be the most efficient way. In NFP organizations, outputs cannot be easily measured in monetary terms. Consequently, it is difficult to state the objectives in quantitative terms and thus measure the extent to which objectives are being achieved. If possible to produce a statement of a particular objective in measurable terms, the objectives should be stated with sufficient clarity that there is some way of judging whether or not they have been achieved. However, the focus will tend to be on subjective judgments rather than quantitative measures of effectiveness. Unlike businesses, where the financial bottom line is a good measure of their effectiveness, NFPs have to rely on other signals such as budgets - variance analysis, comparison of performance with competitors, rating by organization that specializes in analyzing not for profit organization financial performance. Performance measures are important as they help an organization in assessing how well it is doing as well as guiding performance improvement programmes. A typical performance measurement helps businesses in periodically setting business goals and then providing feedback to managers on progress towards those goals. The time horizon for these goals can typically be about a year or less for short-term goals or span several years for long-term goals (Simmons 2000). The expected best result is quantitative or at least qualitative confirmation that operations support specifically defined organizational objectives. In practice, companies should customize performance measures to fit their own specific strategies. Performance is measured in order to; Monitor and control

Drive improvement Maximize the effectiveness of the improvement effort Achieve alignment with organizational goals and objectives Reward and to discipline

Examples of Some Measures of Performance Some of the measures used by Not for Profit organizations to assess whether the set objectives have been achieved include; Measure of satisfaction after service where the organizations monitor and analyse questionnaires to seek feedback from the beneficiaries for example HIV/AIDS Testing programme in Mukuru kwa Reuben slums. One would measure the satisfaction of the beneficiaries by seeking feedback on the following; pre-test counselling, request for consent before the test is done, post counselling and any other relevant referrals after testing. Measure during the service where the donors make unannounced visits with the aim of observing quality of service being offered. For example in the VCT centres, they may send mystery clients who pose as genuine clients. The mystery clients will then report back to the donors on the quality of the services rendered. Measuring the impact on the community or beneficiaries to answer questions such as Has the donors project or programme improved their living standards? For instance drilling of boreholes and installation of water tanks which are meant to improve the living standards of the beneficiaries. Measuring the burn out rate of finances. NFP organizations submit financial and programmatic reports to the donors which should tally with the approved budgets and work plans.

Some measures of performance in for Profit organizations include profitability ratios. For Profit organizations measure their performance by use of ratios among other measures. Some of the ratios include:

a) PROFIT MARGIN RATIOS It refers to ratios that show margins that represent the firms ability to translate sales into profit at various stages of measurements. They express income statement elements as percentages of total revenue. Classified further into: GROSS MARGIN RATIO

It refers to the measurement of the effectiveness of pricing, marketing, purchasing and the production decisions. It looks at costs of goods sold as a percentage of sales. This ratio shows how well accompany controls the costs of its inventory and the manufacturing of its products and subsequently passes on the costs to it s customers. That is, the excess of the selling price over the cost of goods sold and is determined by dividing gross profit by net sales. In other words: Gross margin ratio = Gross margin Net sales


Operating income ratio refers to the measurement of profitability of the firms operations per sales dollar. All the operating revenues and expenses are included in the operating income, but expenses, revenues, gains and losses that are not related to the operations are not. Operating income is expressed as:-

Operating Income Ratio = Operating income Net sales The objective of the Operating Income Ratio is to measure the profitability of the firms most significant operation.


Net profit margin is the simplest profitability analysis. It is the measurement of the proportion of each sales dollar that is profit. The net margin ratio measures profitability after consideration of all expenses including taxes, interest and depreciation. It is determined by:Net income ratio = Net income Net sales CASH FLOW MARGIN RATIO

Cash flow Margin Ratio expresses the relationship between cash generated from operations and sales. It measures the ability of the firm to translate sales into cash. It is determined by:Cash Flow Margin = Cash flow from operating cash flow Net sales b) RETURN RATIOS The return type of profitability ratio divides measures of income by measures of investment required to produce income. It includes the following ratios: RETURN ON ASSET RATIO This ratio measures the efficiency with which the company is managing its assets and using them to generate profit. It is determined by:Return on the asset = Net income Total asset


Return on Equity is the most important financial ratio to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in accompany. It is determined by:Return on equity = Net income Stockholders equities RETURN ON INVESTMENT (ROI)

ROI is profit as a percentage of the investment. I.e ROI = (Profit/Cost of investment) x 100 Example, Cost Profit ROI on the proposed project ROI of divisions at present Division A Kshs 10,000,000 Kshs 2,000,000 20% 25% Division B Kshs 10,000,000 Kshs 1,300,000 13% 9%

Assuming the companys minimum rate of return is 15%. This means any proposed capital investment must have a return of at least 15%. From the above example, the proposed Division As project has an expected return of 20%. This is above the minimum rate of return of 15%. Hence, the project should be undertaken. However, the manager in charge of this Division does not look at the Company holistically, he will reject the project because it will reduce the present Return on Investment i.e. 25% of the Division.

The absence of profit measures in not for profit organizations causes the following problems: Lack of profitability measures may make it difficult to evaluate which program can achieve the given level of effectiveness at the least cost possible.

Lack of accountability and evaluation, as there is no profit at the end of the objective. Lack of profit measures also makes it difficult to set targets .That is, it is not possible to carry out CVP (Cost-Volume-Profit) analysis. Without profit measures, it will be difficult to measure the success of the organizations, management and control of resources. Investors and financial institutions will not be able to know how an organization is performing and, therefore, not know the performance of the organization. There is a need to prepare income and expenditure statements for accountability. Transparent financial reporting indicating progress will enhance the confidence of the donors to bring in more money for the operation of the business; conversely, lack of it will result in failure to attract donors funds. Political difficulties in designing measurement systems due to multiple stakeholders interest. Very high possibilities of corruption due to absence of accountability. Leads to poor project management.

Some of the above highlighted setbacks can be controlled or rather solved through the following; The use of a balanced scorecard which is suitable for measuring organizations performance and effectiveness without necessarily basing judgment on financial perspective alone but also uses other determinants such as customer perspective, internal process perspective and learning and growth perspective. It will include organization objectives, measures of those objectives, target values of the measures and the evaluation. Impact assessment reports, showing what has been achieved vis a vis the proposal report and the donor is furnished with progress report. Time line of the project is evaluated, abrupt and not informing the organization, independent assessors are sent to the field to monitor the project and gives feedback /report. Disbursing money in tranches and as the project goes on upon satisfactory report to the donors. Audited books of account, even though it is not for profit organization, audited accounts are necessary for accountability, compliance purpose and to curb wastage of resource


Accountability measurement, under the nonprofit making organization, there are rules and guidelines for accountability purposes (HAAP) which such organizations are governed by, hence compliance to it.


How these problems extend to activities within business entities which have a profit motive. Support your answer with examples In profit oriented organizations, profit provides the overall measure for both efficiency and effectiveness. The more profit an organization makes, the more effective it is in its operations. The term profit refers to the difference between total revenue and total cost. Using an example Similar problems to those of measuring effectiveness and efficiency in non profit making organizations arise in measuring the performance of non manufacturing activities in profit oriented organizations. This is because, it is extremely difficult to measure the output of a non-manufacturing activities e.g. using Tangaza College as an example. It may be difficult to have a quantitative measure of efficiency and effectiveness although students performance can indicate how well the institution is doing in terms of quality of content delivered by lecturers and how well it is done. Therefore, besides profit measures, there is need to use other indicators to measure performance such as: Employee motivation e.g. BAT pays for the management staff subsidized subscription in a gym of their choice. Another example is Safaricom which has set up a day care centre for their staff. This encourages work life balance hence employees are motivated. Turnover rate and Absenteeism can be addressed through flexi-time as practiced by a majority of USAID projects. Customer satisfaction. This is done through surveys, face to face interaction, emails, telephone interviews and suggestion boxes. Market share. Companies also evaluate their performance by referring to the market share of the products. For example, Nokias market share has been declining due to competition. They determine this by carrying out market surveys.


Management structure e.g. leadership style adopted, how management formulates and implements strategic plans. This is one of the aspects that speak a lot about what a company stands for. For example in the COYA awards, this aspect is evaluated. NIC Bank won two trophies in the best Company secretary of the year category. Another example that explains the impact of leadership style to the organizations performance is Uchumi Supermarkets which has returned to profitability. Customer retention e.g. number of students who gets admitted and graduate in Tangaza College Customer acquisition e.g. measure of the number of new students entering the college every academic year.

Part B A public Health Clinic is the subject of a scheme to measure its efficiency and effectiveness. Amongst a number of factors, the quality of care provided has been included as an aspect of the clinics service to be measured. Three features of quality of care provided have been listed. Clinics adherence to appointment times Patients ability to contact the clinic and make appointments without difficulty The provision of comprehensive patient health monitoring programme

You are required to: (i) Suggest a set of Quantitative measures which can be used to identify the effective level of achievement of each of the features listed:

A set of quantitative measures which can be used to identify the effective level of achievement of:Clinics Adherence to appointment times 1. Average delay in meeting appointment time


For instance, on a particular day, a total of 10 patients were seen at the clinic out of which 3 (i.e. 30%) saw the doctor on time. It is important to find out the reasons why 70% of the total patients were not seen on time. This data can be collected through a logging in system (where the patients arrival time is recorded, doctor signs time he sees the patient). Customers can then be requested to fill a questionnaire which would be compared with data from the logging in system. This is a check for consistency.

Clinic Appointment time table Date Patient Name Agnes Mary Patrick John Mwema Amina Otieno Kiprono Mghanga Appointment Time 8.00 am 8.10 am 8.05 am 8.20 am 9.00 am 3.00 pm 2.30 pm 3.30 pm 11.00 am Time Attended 8.35 am 8.20 am 7.58 am 8.20 am 9.30 am 3.25 pm 3.31 pm 4.10 pm 11.45 am Waiting Time (minutes) 35 minutes 10 minutes (7 minutes) 0 minutes 30 minutes 25 minutes 61 minutes 40 minutes 45 minutes 239 minutes 23.9 minutes

15/11/11 15/11/11 15/11/11 15/11/11 15/11/11 15/11/11 15/11/11 15/11/11 15/11/11

Total waiting time Average waiting time


From the above table, it can be established that the average waiting time in meeting appointment time is approximately 24 minutes. Assuming the maximum allowable time set by management is 15 minutes, this variance is too high, hence unacceptable. Appropriate action should be taken immediately 2. Percentage within 15 minutes of appointment time. This means the patient arrived within 15 minutes of appointment time (i.e. latest time allowed is 15 minutes from the appointment time). 15 minutes is the allowable upper limit. From the above table, it can be seen that 2 patients were seen within the appointment time, 1 patient was seen earlier than the appointment time. From the above table, it can be established that 3 patients were able to meet their appointment time as scheduled. This translates to 30% of the total patients seen that day. 3. Percentage more than 15 minutes late. Any percentage that follows in this category could mean an indication that there is a serious problem in meeting appointment time by the clinic. Its is a danger zone. Perhaps, a survey needs to be done to establish some of the reasons for the delay. From the above table, 70% percent of the patients were seen after 15 minutes of the appointment time. Some patients waited for more than 30 minutes. For example, patient by the name Otieno waited for 61 minutes. 4. Weekly patient complaints patients can be asked to fill questionnaires, suggestion boxes etc. 5. Patients satisfaction survey questionnaires, interviews, suggest boxes etc. Patients ability to contact and make appointments It is not possible to obtain data on all those patients who have had difficulties in contacting the clinic to make appointments. However, an indication of the difficulties can be obtained by asking a sample of patients through questionnaires at periodic intervals to indicate on a scale (Excellent, Good, Fair, Poor and Very Poor) their experience when making appointments. The number of complaints received and the average time taken to establish telephone

contact with the clinic could also provide an indication of the difficulty patients experience when making appointments. The number of complaints received Patient satisfaction survey Average time taken to establish telephone contact with the clinic could also provide an indication of the difficulty patients experience when making appointments.

Client Feedback in the month of October 2011 Patients Patrick John Agnes Amina Otieno Kiprono Mghanga Excellent Good Fair Poor Very Poor

The above table shows that contacting the clinic is a painful affair. Feedback received from patients indicates that 43% found contacting the clinic extremely hard hence rating the services as very poor. Monitoring programme 1. Comparison with programmes of other clinics located in different regions. An example is the use of Clinical Patient Management system which captures patient history.


2. Questionnaires asking respondents to indicate the extent to which they are aware of monitoring facilities currently offered. This is aimed at establishing whether the patients are aware of the various programs/services offered by the clinic. 3. Responses on level of satisfaction from patients registered on the programme. Examples of programs would include the Well Baby clinic, Wellness Clinic, Well Mother and Baby programme, etc. Customer responses can be received through monitoring and analysis of letters of complaint. Also, some companies interview samples of customers or use questionnaires to ascertain the customers perception of service quality. Feedback can also be obtained through emails, telephone interviews, suggestion box and face to face interactions. 4. Percentage of population undertaking the programme. For instance, of the 100 patients visiting the clinic, how many are undertaking nutrition, wellness, and family health programmes?


Indicate how these measures could be combined into a single` quality of care measure.

Combining the measures into a Quality of Care measure requires that weights be attached to each selected performance measure. The sum of the performance measures multiplied by the weights would represent an overall performance measure. However, it should be noted that this approach may result into some problems because weights are set subjectively, and there is a danger that staff will focus on those performance measures with the higher weighting and pay little attention to those with the lower weighting. For example assume weights were allocated as follows; Clinics adherence to appointment time 40% Patients ability to contact the clinic 26% Monitoring programme 34%

The set of quantitative measures mentioned above can appropriately fit into the balance scorecard which will minimize the risk above. This is because the measures can apply to seeking financial strengths, customer satisfaction,

internal operating efficiency and learning and growth perspective. One single `Quality of care measure that can represent all the measures suggested above is the customer satisfaction. This is because all the measures mentioned above are directed towards realizing customer satisfaction.


REFERENCES Drury C. (2008). Management and Cost Accounting. (8th e.d.). London: Thompson Business Press Kaplan R. S., & Norton D. P. (1992). The Balanced Scorecard Measures that Drive Performance. Harvard Business Review February-March: 71-79