Advantages and disadvantages of financial indicators

Traditional performance evaluation mostly uses financial indicators, using financial indicators to evaluate performance is simple and straightforward.

But there are the following shortcomings in evaluating managers' performance using only financial indicators:

(1) Financial indicators are oriented to the past but do not reflect the future, which is not conducive to evaluating a company's performance in terms of its ability to create future value.

(2) Financial indicators are easily manipulated, and excessive focus on accounting profits in corporate financial reports allows corporate management to use various methods to manipulate profits.

(3) Financial indicators are mainly derived from financial statement information and do not include most of the factors that affect a company's long-term competitive advantage, such as product quality, the quality and skills of employees, nor do they reflect the business process and customer satisfaction.