a. Arguments for using the profit measure as the all-encompassing measure of the performance of a business

1. Profit (however calculated) is a generally accepted measure to evaluate a business both internally and externally. Internal users of financial information identify profit as the reward for the skills of being a successful entrepreneur.

This measure is still a major determinant of the reward systems of managers of decentralised units. If they meet certain quantified performance targets they obtain the financial rewards that recognise their entrepreneurial skills.

2. External users of accounts recognise profit as a measure for identifying the success or failure of the policies of the directors who, as stewards of the assets, are entrusted with the task of increasing the wealth of shareholders. Why do an investor invest? Generally to improve their financial position over time.

How do investors improve their financial position over time? Hopefully the stock market’s system of intelligence identifies the important factors in the performance of a business and this is reflected in the share price. How do market analysts identify performance? Certainly the measure of ‘earnings’ is a major determinant in the influential commentaries that can influence investor behaviour.

3. The concept of profit is intuitive. A street trader buys inventory at ₦100 and sells it at the end of the day for ₦500. He makes a gain of ₦400 out of which he replenishes his inventory, pays his living expenses and has a surplus to demonstrate that his wealth has increased after meeting all necessary expenditure.
4. ‘Profit’ is the maximum amount that the company can distribute during the year and still expect to be as well off at the end of the year as at the beginning. Consequently profit-based measures such as return on capital employed and earnings per share recognise this all-encompassing need to measure how wealth (or capital) grows or is maintained.
5. Simplicity and Clarity: Profit is a straightforward and easily understood metric. It provides a clear and unambiguous indicator of financial success, making it accessible for a wide range of stakeholders, including investors, employees, and management.
6. Comprehensive Financial Performance: Profit encapsulates the overall financial health of a business by reflecting revenues, costs, and expenses. It shows the net effect of a company’s operations and financial decisions, providing a comprehensive view of its economic performance.
7. Stakeholder Focus: For shareholders and investors, profit is a primary concern as it directly impacts dividends, stock prices, and returns on investment. Focusing on profit aligns with the interests of these key stakeholders and can drive investment and support.
8. Resource Allocation: Profitability indicates how efficiently a company is using its resources. It helps management identify which areas of the business are most productive and which may require improvement or divestment, thus guiding strategic decisions on resource allocation.
9. Incentive Alignment: Profit as a performance measure can be a powerful motivator for management and employees. Profit-linked incentives and bonuses can drive behaviors that enhance overall business performance, encouraging efficiency, innovation, and cost control.

b. Financial perspective

1. Meeting a key financial target such as Economic Value Added is regarded by some as one of the best overall measures of performance.
2. Sales growth. Insurance companies are concerned with market share and would like to see strong sales growth.

Customer perspective

1. Customer retention. This is the proportion of customers who renew their policies from one year to the next. If the proportion is high, then it would imply that the insurance company is keeping its customers happy; if low, it would seem that the company is doing something wrong.
2. Number of complaints. This measure could be used for just about any organisation. A high level of complaints would indicate that the company’s customers are not pleased with the service that they are receiving.

Learning and growth perspective or innovation and learning perspective

1. Labour turnover. Labour measures come within this perspective. A high labour turnover would indicate that the workforce is not happy, which may then lead to problems with their performance. It also means that those workers who leave will have to be replaced and that their replacements will need training, leading to extra cost and possibly initially poor performance.
2. The number of new types of policies issued each year. This would be a good indication of innovation.

Internal business process perspective

1. The percentage of policies issued or claims processed with the target time. This is an indication of how well the company performs its core functions.
2. Unit cost. The cost per policy issued, or per claim processed, would be an indication of how well the business is performing its internal functions. Care must be taken that if the cost is reducing so then the service to the customer is not getting worse.