Chapter 3: Non-Financial and Non-GAAP Measurement Flashcards
Balanced Scorecards
What is a balanced scorecard?
It is used internally to provide financial and non-financial measurement that is used to provide a competitive advantage
Balanced Scorecards
What are the components of a balanced scorecard?
There are four categories of a balanced scorecard:
* Financial
* Learning and Growth
* Customer Satisfaction
* Internal business process
Balanced Scorecards
What are examples of the learning and growth component of a balanced scorecard?
- Employee Satisfaction
- Retention
Balanced Scorecards
What are the criterion for KPIs?
- Clarity
- Relevance
- Measurability
Benchmarking
What is benchmarking?
Benchmarking uses current data and measures the quantitative and qualitative data against an outstanding performer
Benchmarking
What are the different types of benchmarking?
- Internal: Is the process being compared with other areas in the company only?
- External: Compares the same process with outside sources (i.e. peers, competitors, etc)
- Competitive: How does the process compare against the same type of industry?
- Strategic: Review the process to see if it can be improved?
- Performance: What is the outcome of the current process?
- Process or Functional: Can the internal process be improved?
- Generic: How is our process compared to other industries?
Benchmarking
What is process benchmarking?
- Review organization’s operations in order to find new ideas that would provide an advantage over the competitor
- It provides more choices of measurement, so there are more choices of industries in order to compare to
Value-Based Management
What is the purpose of residual income?
Residual income will help a company determine if they will receive additional benefit if capital is added
Value Based Management
What is the calculation to determine the minimum amount of capital or targeted amunt of interest on invested capital?
Total Assets x Cost of Capital % (or Hurdle Rate)
Value-Based Management
What is the calculation to determine residual income?
Operating Income
(Target Amount of Interest on Invested Capital)
- If the residual income is positive, then proceed with the investment
Value-Based Management
What is the calculation to determine maximum costs based on residual income?
Maximum Costs = Actual Revenue - Targeted Revenue - Residual income
Value-Based Management
What is the calculation to the investment base?
Carrying Equity x Equity WACC +
Carrying debt x (Debt WACC) x (1-Tax Rate)
Value-Based Management
What is the calculation to determine Economic Value Added (EVA)?
After-Tax Operating Income
(Investment Base)
Value-Based Management
What are the steps to calculate the ROI and residual when new investments are added?
Step 1: Calculate new ROI
(Net Profit + Additional Profit) / (Current Asset + Additional Asset)
Step 2: Calculate increase in residual income
Additional Profit x (New Asset x Return %)
Value-Based Management
What are the effects on ROI and residual income when additional long-term assets are purchased?
Since additional capital is added, both the the ROI and residual income will decrease
Nonfinancial Measures
What is the calculation to determine manufacturing cycle efficiency?
Days in processing / Total manufacturing time
Days from Order Placed and Order Completed are not included in this equation
Nonfinancial Measures
What is the calculation to determine the delivery time cycle?
The delivery time cycle is a total number of days from when the order is placed to when the order is shipped
Nonfinancial Measures
What is the difference between financial and nonfinancial measures?
Nonfinancial: Are the objectives associated with business operations?
Financial: Are the objectives associated with the financial performance based on the financial statements?
Nonfinancial Measures
What are the non-financial measurements?
- Quality level of each outgoing product
- Returned merchandise
- Customer complaints and reviews
- Competitive ranking
- On-time delivery
Non-GAAP Measures
What are the types of non-GAAP measurements?
- Free Cash Flow: Operating cash flow - capital expenditures
- EBIT
- EBITDA (Earnings before interest, taxes, depreciation and amortization)
- Core Earnings: Profits from operating activities - amounts from non-operating activities and non-recurring items
Non-GAAP Measures
What are the SEC rules for disclosing non-GAAP financial measures?
- Non-GAAP must be presented along with the most direct GAAP financial measure
- Using Non-GAAP financial measures to material mislead is strictly prohibited
- A reconciliation of Non-GAAP to GAAP is required
