Business benefits, financial non financial defined valued. gas x side effects


The highest level objective for profit making companies is typically stated as "earning profits." (Although the business school professor might prefer to say "increasing owner value, by earning profits.") Companies can use profits only two ways.

Any action outcome that arguably contributes to the profit objective qualifies as a business benefit. Note firstly that outcomes such as increasing sales revenues, or cost savings meet this criterion. When one can estimate the contribution to profit, then the benefit’s financial value is also known. Such might be the case for instance, if a marketing program (the action) raises profits, by bringing revenue increases that exceed expense increases. Expected contributions to profits, in other words, provide one basis for establishing and measuring benefits.

Businesses typically have other financial objectives that support the profit objective, such as Increased sales revenues, increased margins, cost control, staying within budget, cost savings, or avoided costs. All outcomes that contribute directly to meeting these objectives are financial benefits.

Note that the highest level objectives for government and nonprofit organizations are not" earning profits." High level objects for these groups appear in mission statements about service delivery and the populations they serve. These organizations, nevertheless, also pursue financial revenue objectives such as these:

Many businesspeople do not automatically view all benefits in a cost/benefit discussion as "real." In other words, they do not automatically see all benefit claims as legitimate. That is especially true for contributions to non financial objectives, which they measure indirectly through key performance indicators.

For instance, analysis looks forward to cost savings under a proposal plan, most people readily accept the savings as a "legitimate" benefit. If however, the analyst shows a $5M benefit coming from something like higher customer satisfaction, or a better company image, probably not everyone automatically grants the benefit the same legitimacy. For this, they must be led through the reasoning presented in this section and the next.

The analyst shows that the outcome is tangible and measurable by referring directly to this group’s KPI’s for customer satisfaction (above). These are satisfaction survey scores, complaints, opinions, and retention rates. 2. Show That the Outcome Is Likely to Follow From the Action

In other words, the analyst will first try, insofar as possible, to value business benefits directly in financial terms. Failing that, the analyst can compare a non financial benefit to another benefit that does have known financial value. That judgment, of course, may include a subjective component. Some benefits impact financial objectives directly.

In other cases, the connection between KPI changes and financial value may not be so obvious. In those cases, the analyst will approach assigning financial value to the non-financial benefit in two steps: Step 1. Establish value for the objective

Many professional organizations offer membership and certification to groups or companies that meet certain "green" criteria. These stand as KPIs for green status. Also, demonstrated compliance with environmental laws and standards serves as a credible KPI for green status.

There may be no direct and obvious connection between KPI targets for such objectives and financial gains or costs, but it is still reasonable to take Step 1 and ask: What is the value of reaching the target? There is not a single "one size fits all" approach to answering such questions for all objectives, but many times an acceptable answer can be reached by assessing:

As a "last resort" for answering the Step 1 question, the final suggestion above can be surprisingly successful in producing an acceptable, agreeable value for reaching a target. When management is willing to state a figure they would simply be willing to pay, to buy arrival at the target, management has in fact put a precise financial value on reaching the target. Step 2. Establish Benefit Value.

If leaders agree on a value for reaching the objective target, then the analyst can also move to Step 2 and ask: What percentage of the target value from Step 1 should go to the benefit outcome? The value of the benefit can then be taken as the product of the Step 1 and Step 2 answers.

Consider a manufacturing company where managers intend to lower the factory floor accident rate by 50%. To achieve this objective, they will consider ten different initiative proposals. These include, for instance, proposals to hire safety engineers, add protective barriers, and improve real-time sensors on the production line. And, there is also a proposal for expanding and improving employee safety training.

• To all involved, however, such benefits do not capture the full value of a lower accident rate. Those obvious financial benefits do not factor in the value of reduced employee pain and suffering, reduced family distress, or improved employee morale, for instance.

A more satisfying answer to the Step 1 question might result from simply by getting leaders to agree on a price they would pay to realize the lower accident rate. Depending on the size of the company and its workforce, management might be comfortable with a figure such as $1M, or $10M, or something else. In any case, this will certainly equal the total currently budgeted for the ten safety initiatives, but it might very well exceed that total.

Depending on the size of the company and its workforce, management might be comfortable with a figure such as $1M, or $10M, or something else. In any case, this will certainly equal the total currently budgeted for the ten safety initiatives, but it might very well exceed that total. Step 2. What Percentage of Step 1 Value Should Be Credited to One Initiative?

Management may very well decide to credit benefits to each of the ten initiatives in proportion to their estimated effectiveness reducing accidents, or by still other reasoning. In order to avoid over-valuing benefits, they may consciously choose a conservative percentage—say, 5%—but they will very likely not choose 0%.

Where the value of reaching the overall target is agreed as $10M (Step 1), and where the employee training program is granted credit for 5% of that (Step 2), the value of the training program benefit is thus established as 5% of $10M, that is, $500,000. Subjective Value Judgments Can Be Valid and Rational

Note especially that Step 1 and Step 2 value statements may involve subjective judgments. For that reason, some may question the validity of ROI figures and other results based on these values. As a results, some people may very well declare these values invalid for this analysis. However, those who object in this way, however, should remember that managers make subjective value judgments like this routinely and often. Directing the use of resources, for instance, calls for such judgments continually. What is important is that leaders agree on the value figures. Using Benefit Values

With this approach, benefit values for each of the ten safety initiatives can be established and compared to initiative costs with simple return on investment (ROI) analysis. This can provide guidance in cases where the safety program budget has to be reduced and management needs to know which initiatives should be cut, or where leaders try to accelerate the accident rate reduction and needs to know which specific initiatives deserve increased investment.