BAR: NonFinancial and NonGAAP Measures of Performance Flashcards
Customer Retention Rate
summarizes the number of percentage of customers who continue to use an entity’s products or services for a specified time. To maintain or improve this rate, businesses typically need to improve product offerings and value. (i.e. loyalty programs, multiyear contracts)
Employee turnover
Represents the number or percentage of workers/employees who voluntarily or involuntarily (or both) leave the business within a certain time frame (usually one year) and are replaced by new employees.
Labor productivity rate
Indicates the # of units of work completed by a worker in a defined period of time (i.e. man hours). (Total value of output for a specified period of time divided by the total number of labor hours)
Ticket response time
Identifies how long it takes customer service to first respond to a ticket.
Free cash flows (FCF)
Represent the after-tax cash available to capital providers (i.e. investors) after accounting for operating expenses and investment in fixed and working capital
Calculation of and uses of free cash flow
Calculation (Net income + noncash expenses +/- working capital - fixed capital); Uses (Repayments of LTD, Dividends, Stock repurchases)
Core earnings
a concept that was developed by Standard and Poor’s to identify “Business-as-usual” income generate by normal, recurring business operations; not recognized as a GAAP concept but used by management and investor to assess the profitability of the underlying business.
Calculation of core earnings
Pretax earnings - nonrecurring income - pension gains + loss on asset sales
Adjusted net income for nonrecurring expenses
is calculated by removing nonrecurring items from net income to arrive at an amount that represents typical (i.e. recurring) net income
Discontinued operations
A type of nonrecurring expense; gain/loss from the disposal of a component (i.e. segment) of an entity that has a significant effect on the entity’s operations and financial results
Unusual/infrequent items
A type of nonrecurring expense; items that are either unusual in nature or infrequent in occurrence (eg, restructuring charges)
Change in estimate
A type of nonrecurring expense; a gain or loss resulting from a voluntary change in an entity’s estimation policies, such as a change in depreciation methods (eg, straight-line to double declining)
Cost of quality
a philosophy with three core tenets; 1) that failures have causes 2) preventing failures is cheaper than fixing it later 3) measuring a firm’s performance regarding cost of quality helps the firm
Prevention costs
(a type of quality cost) use high-quality materials, provide employee training, require routine preventative maintenance, require supplier education/certifications
Detections/Appraisal Costs
(a type of quality cost) inspection of raw materials, work-in-progress, finished goods; depreciation expense of testing equipment; supervision of testing team
Internal failures costs
(a type of quality cost) disposing of scrap due to wasted materials, reworking defective units, re-inspecting and retesting after rework
External failure costs
(a type of quality cost) warranty, costs, product liability and product recall costs, lost future sales and damaged reputation, lawsuits
Conformance costs
(i.e. prevention + detection/appraisal cots)
Nonconformance costs
(i.e. internal + external failure costs)
Six-sigma quality
a statistical measure of the percentage of products that are in acceptable form, based on standard deviation measures
Total quality management (TQM)
an entity-wide effort to continuously improve the ability to deliver high-quality products and services through systematic analysis; thus, it includes insights from suppliers as well as employees
Theory of constraints (TOC)
bottleneck; is used to maximize operating income and overcome bottlenecks in operations
Strategy maps
i.e. diagrams; help to identify cause-and-effect relationships
Decision trees
as a project evolves, conditions evolve that require new decisions to be made
Value-based management (VBM)
seeks to determine each activity’s financial value (or contribution) to the firm
Value chain
a sequence of processes that create a product or service and then identifies production areas that can be redesigned to improve productivity or quality or can be eliminate altogether
Value proposition
measure of the value added for the customers by the firm’s competitive advantages
Benchmarking
evaluating performance of an entity’s products, services, and/or processes on an ongoing basis (i.e. continuous improvement), relative to the performance within and outside the organization.
Internal benchmarking
compares relative performance of division, stores, product lines, etc.
Technical benchmarking
compares against competitors, often using a SWOT analysis to identify threats and opportunities
Customer and competitive benchmarking
focuses on intangibles, such as adding value, ESG attributes, etc.
Industry benchmarking
focuses on higher level, often assessing financial and/or process performance
Strategic
compares an entity’s strategy to competitors’, similar to comparing processes
Benchmark cycle
1)identify current internal performance level 2) gather current external performance level data (best practice 3) compare entity performance level to best practices level 4) implement and monitor improvement(s) 5) repeat as needed
Advantages of benchmarking
improvement of competitive edge, enhancement in employee morale, identification of strengths and weaknesses, creation of new/improved products/services to differentiate from competitors
Balance scorecard
a strategic management framework that translates an organization’s mission and strategy into a set of performance targets
Financial
How do shareholders perceive us? Measure profitability (return on investment, residual income, etc.) revenue, profit, or asset growth, and financial soundness (debt and equity ratios, etc.)
Learning & Growth (Innovation)
Howdo our employees perceive us? Measures employee satisfaction, training, and advancement to ensure key drives of long-term ability to carry out mission are not neglected in pursuit of shorter-term objectives
Customer
How do our customers perceive us? Measures customer satisfaction (eg through survey) and retention
Internal Business Process
How well are we running our operations? Measures averages and variances in the cost, time, and number of defects involved in producing and delivering a product or service
Strategic objectives
a statement of the firm’s goals and what is needed to achieve them
Performance measures
the quantitative methods to be used to determine how much of the strategic objectives are being reached
Baseline performance
how well the firm is currently doing under each performance measure
Targets
the amount of improvement being sought for each performance measure
Strategic initiatives
what specific changes the firm will undertake to achieve its objectives and targets
External factors (risk)
macroeconomic or industry risks that affect overall industry demand or profitability
Internal (i.e. company) factors (risk)
affect an individual company and that are typically related to competitive positioning or management actions
Risk avoidance
involves using strategy that circumvents the risk entirely
Risk acceptance
occurs when an entity takes no action and simply allows an event to occur
Risk sharing
occurs when the risk burden is partially or wholly distributed to external parties
Risk reduction
can include changing the operating environment (eg diversifying product offerings) or rebalancing an asset portfolio to reduce exposure to certain types of losses
Risk profile
quantifies threats to an entity
