P2 - C7 - Performance Evaluation Flashcards
Sources of data for ratio analysis
- Statement of financial position
- Income statement
- Cashflow statement
- Budget and variance data
- Competitor information
- Industry information
Comparison of financial ratios
Trend Analysis
Cross-sectional analysis
Ratio Categories
Profitability
Shareholder investment
Activity
Liquidity
Solvency
Profitability
Profit Margin - Operating profit / Revenue
ROCE - Operating profit / Long term capital (Total Assets - Current Liabilities)
Working Capital Ratios
Inventory days - Inventory / Total operating costs
Receivable days - Receivables / Revenue x 365
Payable days - Payables / COS x 365
Working capital cycle
Time difference between payment for raw materials and income from sales
Inventory days + Receivable days - Payable days
Liquidity Ratios
Current Ratio - Current assets / Current liabilities
Quick Ratio (Acid Test) - Current assets - Inventory / Current liabilities
Solvency Ratios (Gearing)
Finance Gearing - Long-term debt / Net assets
Interest Cover - Operating profit / Interest payable
Shareholder Ratios
Dividend Yield - Dividend per share / Share price
Earnings Per Share - Total Dividend / Number of shares in issue
Price-Earnings - Share price / Earnings per share
Limitations of financial statement figures for ratio analysis
Historical Data
Financial info only
Limited trend over time information
Only summarised info given
Non-financial performance indicators
Competitiveness
Productivity
Quality
Customer satisfaction
Personnel
Innovation
Advantages of Non-financial performance indicators
Forward looking
All areas of the business are measured
Easily understood
Good indication of long-term performance
Cannot be easily manipulated
Disadvantages of Non-financial performance indicators
Information overload
May not meet ultimate business goals
Spending time and resources on measurements that provide little value
Balanced Scorecard - 4 Perspectives
Customer
Internal Business
Innovation and learning
Financial
Balanced Scorecard - Customer
- Customer satisfaction
- Number of returns
- Number of customers moving to the competition
- Call waiting time / service time
- Delivery time
- Percentage of delivery’s on time
Balanced Scorecard - Internal Business
- Time per unit
- Number of defective products
- Cost per unit
- Material wastage rates
Balanced Scorecard - Innovation and learning
- Number of new products developed
- Sales from new products launched
- Development time of new projects
- R&D spending
- Amount spent per employee on training
- Number of qualified staff
- Number of training programmes available
Balanced Scorecard - Financial
- Profits
- Return on investment
- Residual income
- Costs
- Sales
Benchmarking - Definition
Comparison of performance and business processes to the best in the industry or best practices from other industries
Benchmarking - Procedure
- Identify areas to be benchmarked
- Map current process and measure current performance levels
- Identify organisations which are leaders in the area
- Decide who and how to benchmark performance
- Survey and data collection
- Compare performance
- Decide on changes needed
- Review progress
Benchmarking - Difficulties
- How to successfully get relevant information about competitor performance
- Hard to make meaningful and fair comparisons
- Too many measures
- Conflicting measures make decision making more difficult
