13: Performance measurement Flashcards
What is a strategic control system
A system put in place, once the organisation has implemented its change, to monitor whether it is achieving what it was set out to achieve.
Perform strategic review, set strategic objectives, set target achievement levels, monitor, reward
What is a budget
A plan expressed in financial terms, typically ST (1 YEAR), stepping stone to achieving LT mission/objectives
What are benefits of budgets?
- Promotes fowards thinking in terms that potential problems and solutions are identified early
- Helps identify linked parts of the business and ensure managers work together to achieve desired joint outcomes
- Sets targets and motivates performance to achieve those targets
- Provides a bais of control by comparing actual results to budget and determining causes for variances
- Provides a system of authorisation by allocating managers fixed funds and authority to spend
What are the features of successful budgetary control?
- Buy in and adherence in respect of senior management
- Accountability with clear responsibilities
- Motivating targets that are challenging but achievable
- An established system of regular data collection and reporting
- Targeted reporting and short reporting periods that are timely
- Creation of action - reporting variances and causes of variances is not enough, must act
What can a control system be built around?
Critical success factors (CSFs) and Key performance indicators (KPIs)
CSFs focus management onto things that need controlling
KPIs measure the performance
What are limitations to just looking at financial performance measures?
- Encouragement of ST focus e.g. ST cost cutting may lead to issues in future (e.g. lack of marketing)
- Ignores strategic goals: goals such as superior customer satisfaction cannot be seen
- Historic measures: lagging indicators of past performance, management need lead indicators of where problems are occuring.
- Distortability: can be manipulated through creative accounting
What is a balanced scorecard? How are they constructed?
A scorecard that aims to make managers think in 4 perspectives
How do we look to shareholders ~ How do customers see us?
Fs Measures/ KPIs ~ CSFs Measures/KPIs
What is the vertical vector?
Four perspectives are linked:
- Innovation and learning - skills/processes, which underpin….
- Internal business - quality, efficiencies, which result in….
- Customer - enhanced relationships with loyalty, which manifest as…
- Finance - sales/profit and return on investment
What are problems with the balanced scorecard?
- Conflicting measures e.g. spending on R&D against an overall target of cutting cost
- Selecting measures - must be appropriate measures, also the number of them
- Interpretation and expertise - difficulty putting figures into perspective, scorecard only useful if it initiates action
What measure of performance do mainly not-for-profit orgs use?
3 E’s
Economy - cost of resource given an acceptable level of quality e.g. funds for new hospital
Efficiency - processes used to convert inputs into outputs e.g. staff rota, admin
Effectiveness - outcomes of the activity e.g. number of patients helped
What are some measures of growth?
Sales revenue
Market share
Profitability
Number of:
-Employees
-Units
-Customers
What are some measures of profitability?
Gross profit margin
Net profit margin
Mark up applied
Year on year increase
Measures of liquidity and gearing
Working capital cycle:
-Inventory days
-receivable days
-payable days
Current ratio
Gearing ratio
What is the formula for Return on capital employed? And what does it tell you
ROCE= Profit for the period / Average capital employed during period x100%
How hard the assets of a project/division/company have been worked in earning profit.
How is residual income worked out ?
Divisional profit - (net assets of division x required rate of return)
Residual income = divisional profit - (net assets of division x required rate of return)
