Module 9 : Performance Management Flashcards
In a balanced scorecard, the four perspectives are :
Financial
Customer
Internal business process Learning and growth
performance management and metrics : definition
guarantee our operations are as efficient and effective as possible.
–> These metrics enable managers to identify when adjustments are necessary to maintain the business’s progress.
When designing accounting-based performance measures, companies typically employ three steps
- choose performance measures that align with top management’s financial goals.
- choose the details of each performance measure in step one.
- choose a target level of performance and feedback mechanism
targets should be…
attainable, still challenging, and they should be transparent
Different Concepts of performance management systems
Financial, Multidimensional, Integrated
Basis for All Frameworks: Financial Performance and Their Drivers
The Triangle of Financial Performance
The Triangle of Financial Performance
- Profitability indicators –> return
- Liquidity –> Liquidity indicators
- Risk –> Safety Indicators
Four Measures to evaluate Subunits Performance (DuPont method)
Return on Investment
Residual Income
Economic Value Added
Return on Sales
Return on Investment (ROI): definition
is an accounting measure of income divided by an accounting measure of investment
—> profit making
Return on Investment (ROI): calculation
EBIT = EBIT/ Revenue x Revenue/ ∅ Invested Capital
Return of sales
EBIT/ Revenue
–> in percentage
Turn over capital
Revenue/ ∅ Invested Capital
DuPont Method of Profitability Analysis
Return on investement
–> It recognizes the two basic ingredients in profit making: increasing income per dollar of revenue and using assets to generate more revenues
Residual Income (RI): definition
is an accounting measure of income minus a dollar amount for required return on an accounting measure of investment
is a measure of profitability that calculates the net income generated by a project or business unit after accounting for the cost of capital. It’s used to assess whether a project or division is producing earnings above the minimum rate of return required by investors or management.
Residual Income (RI): calculation
Income − (RRR x Investment)
Required rate of return (RRR)
times the investment is the imputed cost of the investment
Economic Value Added (EVA): definition
EVA is a variation of Residual income used by many companies
EVA : calculation
After_tax Operating Income − [WACC x (Total Assets − Current Liabilites)]
WACC
weighted-average cost of capital
EVA substitutes the following number in the RI calculation
Income: After-tax operating income
Required rate of return: (After-tax) weighted-average cost of capital
(Accounting measure of) Investment: Total assets minus current liabilities
Return on Sales (ROS): definition
Known as the income-to-revenues ratio or the sales ratio
–> It is frequently used, simple to compute, and widely understood
–> It does not take into account investment
–> It measures how effectively costs are managed
