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Validate the Links Between Nonfinancial and Financial Controls
As you recall, organizations often use more than one nonfinancial control with
the assumption that they cascade down to bottom-line financial performance. Of
course, when there are fewer nonfinancial controls, it is easier to detect relationships

among them. Regardless, with information collected about the controls, management
must seek to use simple statistical techniques to verify the causal relationship
between one control and another, and eventually financial performance. For instance,
if nonfinancial controls were functioning as assumed, you might find that when
employees are more satisfied, customers are more satisfied, and when both are more
satisfied, more higher-profit-margin products are sold. If such relationships can’t be
proved, then managers must revisit their choice of nonfinancial controls.
Set Appropriate Performance Targets
Extending the prior example, you would want to be sure that you set employee
and customer satisfaction control targets appropriately. Assuming that you validated
the linkages, while it might be nice to reach 100% satisfaction levels across
employees and customers, it might not be cost-effective. This does not mean that you
abandon the use of such controls; instead you must determine whether 90%
satisfaction (or some other number) still leads to greater product sales.
Validate the Performance Measures
Finally, make sure that what you ultimately measure fits well with the control
objectives. For instance, with our retail store example, would you measure work
experience by the number of years that an applicant has worked? Or would you want
experience with a particular type of product or service? Similarly, with regard to
education, you would want to make a choice as to measuring grade-point average,
standardized test score, or major. As a reminder, this type of validation is relevant to
nonfinancial and financial measures alike. For instance, if our hypothetical store’s
sales are growing, but profitability is going down, then we would want to figure out
why these financial controls aren’t painting the same picture. For example, it might
be that we’ve hired more salespeople, who help us sell more, but that we are not
selling enough to cover the additional costs of the added people’s salaries. These
examples should help you see the point about using the right measure.
KEY TAKEAWAY
Nonfinancial controls, such as those related to employee satisfaction,
customer service, and so on, are an important and increasingly applied form of
organizational control. While firms that use nonfinancial controls well also
perform much better than firms that don’t use them, there is a plethora of
managerial mistakes made with regard to their conceptualization,
implementation, or both. Beyond simply using nonfinancial controls, best
practices around such controls include aligning them with the strategy,
validating the links between nonfinancial controls and financial controls,
setting appropriate control performance targets, and confirming the right
measure of the desired control.
EXERCISES
1. What are nonfinancial controls? Name some examples.

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