Performance Indicators Flashcards by Charlie Spain

Why does a business need to measure performance?

To achieve a target or goal
Ensure they are sticking to budget
Identify any areas for improvement
Compare to previous periods

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How does a business measure performance?

Performance indicators:
A budget
A benchmark
Ratio Analysis

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What is economies of scale?

Where activity levels increase there may be opportunities to reduce cost due to bulk discounts or spreading fixed costs over a period of time.

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What is the learning effect?

Relates to the fact that individuals and organisations may become more efficient as time goes on due to everyone getting more used to the way things are done. This won’t last forever.

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What is quantitative and qualitative data?

Data which can be stated in numbers
Data which can’t be put into numerical terms, consists of people’s opinions or judgement.

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What is the formula for return on capital employed?

Profit from operations / Capital + NCA or
Profit from operations / NCA + Net current assets (Net assets)

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What is the formula for return on total assets?

Profit from operations / total assets x 100

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What is the formula for return on net assets?

Profit from operations / Total Equity

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What is the formula for gross profit margin?

Gross Profit / Revenue x 100

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What is the formula for expense / revenue?

Specified expense / Revenue x 100

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What is the formula for operating profit margin?

Profit / Revenue x 100

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What is the formula for asset turnover?

Revenue / Net assets

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What is the formula for Inventory turnover?

Cost of sales / Inventories

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What is the formula for Inventory holding period?

Inventories / Cost of Sales x 365

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What is the formula for trade receivables collection period?

Trade receivables / Revenue x 365

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What is the formula for trade payables collection period?

Trade payables / Cost of Sales x 365

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What is the formula for working capital cycle?

Inventory + Receivables - Payables

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Name some non financial indicators?

Product quality - rejections per 100
Delivery - % of products delivered on time
Absenteeism - How many days on average employees have off
Customer satisfaction - Number of repeat orders

What are the advantages of non-financial indicators?

Easy to calculate
Easy to understand
Tailored to circumstances

What are the limitations of ratio analysis?

When comparing with historical periods, the indicators do not account for inflation.
Different policies on depreciation etc can make comparison harder.
Only a single snapshot in time, the next day the position could change.

What are the costs relating to quality management?

Prevention costs - costs associated with preventing faulty output, for example training in quality control
Appraisal costs - costs of checking quality, inspection costs
Internal failure costs - Costs of rectifying problems within the organisation
External failure costs - costs incurred when the product reachers the customer

What are benefits of TQM?

Reduction of Internal and External failure costs
Improved reputation and goodwill
Increased sales
Motivated staff due to job satisfaction

What is the balanced scorecard?

Framework which can be used to determine which performance indicators are important to a business. The four aspects are:
Customer perspective
Internal perspective
Innovation and learning perspective
Financial Perspective

What are the performance indicators for a Non-Profit organisation?

Economy - Controlling costs
Efficiency - Value for money
Effectiveness - Getting done what needs to be done

Advantages of BSC?

Clarify and update strategy Communicate strategy Align unit and goals with the strategy.

Ethical considerations on setting targets/performance indicators?

If a certain goal or target is based on production workers and can be manipulated by them this may encourage unethical behaviour in order to reach the goal, for example, cutting costs on training will eventually lead to inefficiencies or mistakes. If a goal or target is deemed unfair and unachievable this could demotivate workers and have an effect on the business.

What is meant by management accounting?

Monitoring and controlling costs, usually a business will do this by allocating aspects of the business to different managers to manage.

What is a cost centre?

Where costs are charged to and can be monitored and controlled. Costs will be allocated or apportioned to cost centres before being absorbed into product costs

What is a profit centre?

Includes expenditure and income, meaning profit can be calculated.

What is an investment centre?

Income, expenditure and investment is included. Investment could be in the form of non-current assets but can also include parts of working capital such as inventory, payables, receivables and cash. Comapre profit with investment.

What is the formula for ROI?

Controllable profit / Capital employed Controllable profit is after depreciation but before tax Capital employed = total assets - current liabilities

What is residual income and what is the formula?

Operating profit - cost of capital charge capital employed for the divison x cost of capital (or interest rate)

What is transfer pricing?

Prices charged when goods are supplied from one division of an organisation to another. If transfer price is too high then excess profit will be made by the supplying division at the expense of the receiving division.

How to set a transfer price?

Market price - best option, no one benefits Marginal or absorption cost Divisionally agreed price - fair outcome Cost with markup applied.

What is important when setting a transfer price?

That it is perceived fair by all parties, this will then motivate managers.

What is the formula for asset turnover?

Sales Revenue / Net assets

How to work out residual income?

Operating profit - (cost of capital x initial investment)

What do each of the perspectives on the balanced scorecard show?

Financial - Satisfying shareholders, generating profits Customer - Customer satisfaction and Customer loyalty Internal - Technical excellence and quality issues Innovation and Learning - Improvement of services and devlopment of products

Name two things which couldve happened if gross profit margin has increased?

Increase in selling price Decrease in variable cost per unit

Name two things which couldve happened if gross profit margin has decreased?

Sales price have fallen Cost of sales increases

If gross profit increases, but operating profit stays the same, what could've happened?

Average selling price per unit has increased Other expenditure has increased

If operating profit decreases what could've happened?

Increase in expenses Decrease in total sales revenue

How to work out inventory holding period if inventory is not shown?

Average between opening and closing period. If opening period isn't shown, use closing period