The IUP Journal of Accounting Research and Audit Practices:
Measurement of Financial and Operational Efficiency: A Literature Review

Article Details
Pub. Date : Jan, 2022
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP20122
Author Name : N S Sudesh* and Saradhi Kumar Gonela
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 7



Efficiency is at the heart of management literature - operational, financial, market and other efficiencies form the core of every seminal research in the field. It has been noted that financial efficiency is the most important for the sustenance of any firm. However, financial matrixes are an outcome of operational efficiency, which needs to be studied. Since the proposal of 'factors of production' theory, economic literature has provided various methods to figure out the optimum combination of factors to be employed in any firm. Factor productivity theories are vastly employed to measure the operational efficiency of a firm. In this context, the paper aims at reviewing various established methods of measuring the financial and operational efficiency of a firm.


Since financial management emerged as a new discipline, many studies have concluded that poor financial management to be the chief cause of businesses failures (Meech, 1925; Lauzen, 1985; Bruno et al., 1987; and Wood, 1989). It has been well established that financial performance of a company can either make or break its fortunes. Dun & Bradstreet's Business Failure Records (1994) showed that 'poor financial practices' is the most common cause of business failures after 'economic conditions'. With the establishment of financial performance as a critical aspect in defining the survival of a company, efforts have been made to develop models that measure the financial health of a company accurately, and warn a corporation over a calamity well in advance. Of these models, DuPont model and Altman Z-Scores are the widely accepted models to gauge the financial health of a company (Boyd, 1989; Blumenthal, 1998; Isberg, 1998; Firer, 1999; and Kelly, 2005).