Financial/ Non Financial Measures of Performance Flashcards
Acid Test - Quick Ratio
The acid test ratio is the ratio of quick current assets to current liabilities.
Cash= Mktble Securities / Current Liabilities
Appraisal Costs
Appraisal costs are costs associated with quality control and include testing and inspection.
BSC - Balanced Scorecard
Four Perspectives
- Financial - Specific measures of financial performance
- Customer - Performance related to targeted customer and market segments
- Internal Business Processes - Performance of the internal operations that create value (i.e., new product development, production, distribution, and after-the-sale customer service)
- Learning , Invovation and growth -—Performance characteristics of the company’s personnel and abilities to adapt and respond to change (e.g., employee skills, employee training and certification, employee morale, and employee empowerment)
BSC - Balanced Scorecard
The primary purpose of the balanced scorecard is to measure performance.
Economic Value Added
EVA is often used for incentive compensation and investor relations.
This is likely due to the emphasis on the use of income (first part of the equation) exceeding the cost of capital (second part of the equation) in measuring wealth creation.
Economic Value Added
EVA suffers from its origins in accrual-based NOPAT and the difficulty in defining the nature of economic profit (i.e., economic profit is not cash-based, but it is often adjusted such that it is not strictly accrual-based either).
Economic Value Added
EVA = NOPAT − WACC (Total Assets − Current Liabilities)
NOPAT = net operating profit after tax;
WACC = weighted average cost of capital
0Economic Value Added
- EVA is an economic profit (EP) metric and a specific form of residual income. Like other forms of residual income, EVA is stated in dollars.
- Economic value-added is equal to net operating profit after taxes minus the cost of capital.
Expected Value
It is not always possible to make decisions under conditions of total certainty
Decision makers must have a method of determining the best estimate or course of action where uncertainty exists.
One method is probability analysis. Probabilities are used to calculate the expected value of each action. The expected value of an action is the weighted-average of the payoffs for that action, where the weights are the probabilities of the various mutually exclusive events that may occur.
External Failure Costs
External failure costs are incurred for products that do not meet requirements of the customer and have been shipped to the customer.
Gross Margin
Gross Margin = Revenue - Cof GS/ Sales
This is a conventional metric that reflects profitability prior to the recognition of period expenses (i.e., selling and general/administrative expenses)
Gross margin is equal to gross profit divided by sales. Gross profit is equal to sales minus cost of goods sold.
Internal Business Cycle
Internal Business Processes—Percentage of production downtime, delivery cycle time (time between order and delivery), manufacturing cycle time/throughput (the time required to turn raw materials into completed products), manufacturing cycle efficiency (ratio of time required for nonvalue-adding activities to the total manufacturing cycle time), standard cost variances, product defect rate, amount of scrap and rework
Cycle time would be an important measure for the business processes perspective. It measures the time it takes to produce a product.
Internal Business Processes
Internal Business Processes - Performance of the internal operations that create value (i.e., new product development, production, distribution, and after-the-sale customer service)
The number of defective units would appear in the internal business processes perspective which includes measures of cost, quality, and time performance.
Internal Failure Costs
Internal failures occur when substandard products are produced but discovered before shipment to the customer.
Pareto Chart
A bar graph that ranks causes of process variations by the degree of impact on quality.
The Pareto chart is a specialized version of a histogram that ranks the categories in the chart from most frequent to least frequent. A related concept, the Pareto Principle, states that 80% of the problems come from 20% of the causes. The Pareto Principle states: “Not all of the causes of a particular phenomenon occur with the same frequency or with the same impact.”
Prevention Costs
Prevention costs involve any quality activity designed to do the job right the first time.
Quick Ratio or Acid Test
Quick Ratio or Acid Test Ratio = (Current Assets − Inventory) / Current Liabilities
This metric removes inventory since inventory is often less liquid than other current assets, such as short‐term investments and receivables. Also, inventory may be valued at liquidation value only when a company is in distress making it less appropriate for meeting current obligations.
Residual Income
Residual income is equal to net operating profit minus the cost of capital based on average capital invested in the division.
ROI
ROI equals net operating profit divided by sales times sales divided by total assets.
These two ratios comprise the simple DuPont equation
Alternatively, The return on investment would be computed by dividing net operating income by average invested capital
ROI is highly related to stock price and, therefore, shareholder value.
Six Sigma
Six Sigma: A statistical measure expressing how close a product comes to its quality goal. One-sigma means 68% of products are acceptable; three-sigma means 99.7% of products are acceptable. Six-sigma is 99.999997% perfect: 3.4 defects per million parts
Strategy Initiative
A strategy initiative in the balanced scorecard framework is a key action program required to achieve strategic objectives.
Cash Flow Return on Investment CFROI
- CFROI is often used for incentive compensation, valuation, and capital budgeting. This is likely due to the emphasis on cash flow and the wide acceptance of cash flow for these purposes.
- CFROI suffers from the weaknesses inherent in rate-based metrics (i.e., diluted hurdle rate problem and the potential difficulty in applying rates to analysis where negative cash flows are involved
Value-Based Management (VBM)
Refers to relatively new financial metrics and processes for using them.
The most popular VBM metrics and their creators include economic value added (EVA)
Free Cash Flow
Free cash flow is equal to net operating profit after taxes plus noncash expenses less capital expenditures and the change in working capital requirements.
