P2 - 5. Performance and Budgets Flashcards
What are the 3 categories of KPI?
- Profitability
- Asset Utilisation
- Liquidity
What is the equation for Return on Capital Employed?
PBIT / TALCL
What does ROCE look at?
How effectively the assets of the business are being used to generate a return
What is the equation for gross profit margin?
Gross Profit / Revenue
What does gross profit margin look at?
What is the trend in underlying sales margins, and how well are you controlling production costs?
What is the equation for operating profit margin?
PBIT / Revenue
What does operating profit margin look at?
Are operating costs being kept under control, and are those operating costs fixed or variable?
What is the equation for asset turnover?
Revenue/TALCL
What does asset turnover look at?
How effectively are the assets of the business being used to generate revenue
What is the alternative calculation for ROCE?
Operating Profit Margin x Asset Turnover
What is the equation for the current ratio?
Current Assets / Current Liabilities
What does the current ratio look at?
Can the business meet its obligations when they fall due?
What is the equation for the quick ratio?
(Current Assets - Inventory) / Current Liabilities
What does the quick ratio look at?
Can the business meet its obligations when they fall due, considering inventory is not easy to turn into cash quickly?
What is benchmarking?
Identifying best practise for a particular task or function, through data gathering, and using this as a basis for setting targets and aiming for improvements and adoption of best practise
What are the 4 types of benchmarking?
- Internal
- Functional
- Competitive
- Strategic
What is internal benchmarking?
One division is compared to another within the same organisation
What is functional/operational benchmarking?
Comparing an internal function with the best external performer, even if that is in another industry
What is competitive benchmarking?
Obtaining information on a direct competitor
What is the difficulty in competitive benchmarking?
They will not willingly share information - often need to buy products and examine then
What is strategic benchmarking?
A higher level of competitive benchmarking focusing on strategic decisions and changes happening within the competitors organisation
What are the 4 main benefits of benchmarking?
- Setting tough but attainable performance levels
- Forces business to look at competitive environment
- Identify where process improvements are needed
- Driver for change in a business
What is the benefit of using non financial performance indicators?
Helps to consider what underlies successful financial performance, and gives a better insight into probable long term success
What are 5 key examples of non financial performance indicators?
- Staff turnover percentage
- Number of new products launched to market
- Customer satisfaction scores
- Wastage measures
- Quality control reject rate
What is the balanced scorecard?
An approach to performance management that emphasises the need to provide the user with a set of information that addresses all areas of performance, both financial and non financial
What are the 4 areas of the balanced scorecard?
- Financial
- Internal Business Processes
- Customer
- Innovation & Learning
What are 3 key examples of financial KPIs on the balanced scorecard?
- ROCE
- Net profit margin
- EPS
What are 3 key examples of internal business process KPIs on the balanced scorecard?
- Quality control reject rate
- Turnaround time
- Production set up time
What are 3 key examples of customer KPIs on the balanced scorecard?
- Customer satisfaction score
- % on time deliveries
- Warranty claims %
What are 3 key examples of innovation and learning KPIs on the balanced scorecard?
- Staff retention rate/turnover
- Number of new products launched to market
- % revenue from new products over the last period
What is the use of the balanced scorecard in budgeting?
Ensure that resources are allocated in an effective manner based on the 4 elements, with a long term focus on the underlying success factors
What are the 2 main problems of the balanced scorecard?
- Danger of information overload
2. Short term vs long term conflicts (e.g. R&D)
What is the process in top down budgeting? (3)
- Overall target set by senior management
- Principle budget factors set, and then operational budgets set
- Reviewed by departments to see if achievable, can be challenged by senior management make the final call
What is the process in bottom up budgeting? (3)
- Each department identifies what is achievable
- Principle budget factor is set, and then operational budgets set
- Senior management review, challenge, and make the final call
What are the 3 benefits of top down budgeting?
- Considers overall company objectives
- More time efficient
- Senior staff can see ‘big picture’
What are the 4 benefits of bottom up budgeting?
- Greater involvement and buy in from budget holders
- More motivational for staff
- More likely to take ownership
- Likely to be more realistic, take account of relevant information
What is the greatest risk with allowing bottom up budgeting?
May tempt incorporation of budgetary slack
