Performance Management

Question 1

Analysis layout

Answer 1

Quantitative
Brief conclusion
Qualitative
Pros
3-4 Points and reason
Cons
3-4 risks, reasons and recommendation to mitigate
Overall recommendation/conclusion

Question 2

Qualitative phases

Answer 2

• that have not yet been incorporated into the analysis. This could negatively/positively affect the results of the NPV.
• There is a risk that the price increase will affect demand and additional units will not be sold. Again, this could negatively affect the results of the NPV.
• There is a threat of offshore manufacturers copying, which could increase competition and decrease profits, especially if a patent is not obtained.
• contract in place that guarantees sales
• This can provide a competitive advantage.
• lose control over quality because the business practices employed and manufacturing processes will be at the discretion of the overseas manufacturer, which could impact reputation, decreasing profits
• It is easier for others to copy the design if manufacturing is outsourced overseas and no longer under your control. This increases the threat of greater competition.
• There is a foreign-currency exchange risk in moving production overseas, which could cause fluctuations in profitability.
• This will necessitate sharing management decisions, which could slow down the speed at which future decisions are made.
• reduces your creative control
• not a good fit for you
• is not a driver of that cost

Question 3

Recommendation phases

Answer 3

• consider producing and maximizing sales on product that makes the highest contribution margin per constrain. A market analysis would need to be done to determine minimum and maximum sales volumes for each type.
• ensure that you have a compatible working relationship and that you have jointly established the future direction you want the company to go in.
• consider hiring a lawyer to walk you through the agreement to ensure you understand and agree with all aspects of the agreement prior to signing. If there are any areas of the contract you do not agree with, you could propose different terms and attempt to negotiate these.
• To protect yourself from arbitrary price increases from Sassy, you could add a clause to the franchise agreement that states price increases can only occur once a year and cannot exceed a certain percentage, such as the consumer price index.
• ensure you have enough time to research and have a well-thought-out business plan before proceeding with a store to ensure its success, or risk losing money on your venture.
• hire someone to perform market research on consumers

Question 4

Vision, mission and value analysis

Answer 4

Vision
Mission
Values
Overall conclusion

Question 5

Cost allocation

Answer 5

Your current costing system allocates costs based on a system derived by the
accounting department. In many cases it would appear that the allocation base for the
cost is not the appropriate cost driver. This results in costs being allocated to a product that does not create the cost or benefit from it. This can result in a skewed perception of what the true profitability of a product line is and can lead to poor decision-making.

Question 6

Pricing strategy

Answer 6

Pricing based on variable costs will not yield accurate or useful information when the amount of fixed costs is significant and when the fixed cost per unit for each product is not approximately the same.

Question 7

Explain NPV analysis

Answer 7

An NPV analysis is appropriate because the cash flows associated with the opportunity will occur over a long period of time.
The NPV analysis considers only the incremental cash flows that would result if the proposal is accepted. Based on the assumptions provided, accepting the opportunity would generate a “positive NPV of approximately $5.6 million over the 25-year period”. Therefore, from a quantitative perspective, you should “accept” the proposal.

Question 8

Performance management system

Answer 8

The objective of the performance management system should be to encourage greater effort and decisions that are in the best interest of the organization as a whole.
Current system
Qualities and Issue

Question 9

Current Performance management system

Answer 9

straightforward to calculate and understand, and focusing on “cash flow” is important to the business.
However, this system is also very simplistic.
Some of the issues with it are as follows:
* It considers only financial results and ignores other aspects of operations that might
be critical to long-term success, such as “fan experience and team competitiveness”.
* It motivates management to make decisions that are focused on the shorter term,
potentially ignoring projects that “reduce cash flows in the short term but improve
cash flows over the longer term”.
* A concern with any assessment based on a single performance measure is that it
can be subject to manipulation.
* Management likely does not have control “over all of the elements that impact
operating cash flows”.

Question 10

Balanced scorecard

Answer 10

The balanced scorecard is a performance management system that emphasizes the
importance of measuring success against more than just a single financial measure
such as “annual cash flows”. Paying attention to various balanced scorecard perspectives based on key performance indicators should lead to long-term financial success while maintaining important company values.
The result of implementing the balanced scorecard is that management will be
motivated to make decisions that achieve the key success factors, which are in the
long-term best interest of the company, as opposed to focusing only on “short-term goals”.
A balanced scorecard measures performance in an organization from four different perspectives: financial, customer, internal, and learning and growth. This forces managers to focus on various aspects of the business in a balanced way, and not just solely on financial metrics.

Question 11

BSC Financial perspective

Answer 11

The financial perspective uses key financial metrics to track the success of the organization. As each division is an “investment” centre, you should evaluate their ability to generate “revenues, control costs, and invest in capital”.

Question 12

BSC Customer perspective

Answer 12

The customer perspective looks at how well the organization meets its customers’ needs. This ties heavily into your key success factor of…

Question 13

BSC Internal perspective

Answer 13

The internal perspective assesses efficiency and quality — things that a company does well inside the organization. This ties heavily into key success factor “of quality”.

Question 14

Learning and growth perspective

Answer 14

Learning and growth evaluates how the company supports its employees and the culture of the organization. Tie with KSF (key sucess factors).

Question 15

Bonus calculation

Answer 15

All perspectives have been weighted equally (25% each), to stress the importance all perspectives have on the success of the division. Managers have been evaluated by comparing their results to…

Question 16

Bonus recommendation

Answer 16

There hasn’t been a structured approach for determining the managers’ bonuses in the past. This haphazard approach is confusing for the managers, as there are no clearly defined goals or metrics to work toward. Therefore, having a well-documented performance management framework will help get the most out of its managers and incentivize them to achieve company’s objectives.
Basing the manager’s bonus solely on financial metrics can be misleading, as there are many actions a manager can take to maximize their division’s short-term financial performance, such as cutting employee training, reducing research and development (R&D), or purchasing lower-quality supplies. These actions will hurt the division’s long-term performance if they continue.
BIM has a focus on “quality”, which can’t be quantified based on financial metrics alone. It is important to assess managers on these non-financial metrics in addition to financial metrics. Therefore, I recommend that implement a balanced scorecard approach for evaluating each divisional manager’s performance in determining their bonuses each year.
The framework should be communicated to the managers at the beginning of the year, clearly outlining what the balanced scorecard tracks and why the metrics within the tool have been chosen. Divisional managers should be invited to provide feedback on the measures. This will ensure buy-in from the managers and give them an opportunity to understand, contribute, and work toward the metrics they are being evaluated upon.
- direct control

Question 17

Performance measures for a not-for-profit organization

Answer 17

Whereas performance measures in a for-profit organization are ultimately directed at
maximizing shareholder value, not-for-profit organizations often have many stakeholders (including financial donors, government funders, and volunteers) that need to be considered when developing performance measures.
In a not-for-profit organization, performance measures should focus on using the
resources to which the organization has been entrusted effectively. The measures
should consider all of the inputs the organization uses (such as volunteer hours and
fundraising campaign spending) and measure the extent to which the resources are
being used to realize the organization’s mission.
Measures: compared to targets and the prior year.
1. number of spots
2. number of returning = well received
3. number of new = reaching more people
4. participation rate (the percentage of available spaces that are filled)
5. The cost per participant in terms of cash expenses and volunteer time should be
measured for each program
6. For each fundraising initiative (including the raffles, auctions, and gala dinners), the
funds raised (net of expenses) should be measured against the effort required to
undertake the initiative. This will allow to assess whether initiatives that use more resources are worth the additional effort.
7. The total number of volunteers engaged should be measured and compared to prior years
8. Volunteer satisfaction should be measured through a survey after the program. The
survey could ask questions such as whether the volunteers felt their skills were well
utilized, whether their contributions were valued, where improvements could be
made to future offerings of the program, and whether they would volunteer for the
program again in the future.
9. Participant satisfaction should be measured through a survey after the program.
The survey could ask participants to rate various aspects of the program, including quality of instruction, interest in the activities, and so on.
10. The number of corporate donors and the average amount raised per corporate
donor should be measured, as increasing corporate donations will allow to better meet its objectives.
11. The percentage of donated funds spent on administrative expenses not directly
related to program delivery should be measured and compared to acceptable standards and best practices for not-for-profit organizations.

Question 18

Responsibility centres

Answer 18

First, we must determine the type of responsibility centre that each division is so that their performance can be evaluated based on financial metrics they have direct control over. There are four different types of responsibility centres:
1. Revenue centre: responsible for maximizing revenues.
2. Cost centre: responsible for controlling costs.
3. Profit centre: responsible for maximizing revenues AND controlling costs.
4. Investment centre: investing in capital expenditures, in addition to profit centre responsibility.

Question 19

Tax shield

Answer 19

Tax shield = [(CdT) / (d + k)] × [(1+1.5k)/(1+k)]
C = Initial investment
d = CCA rate
t = tax rate
k = discount rate

Question 20

PESTEL

Answer 20

Political,
Economic,
Societal,
Technological, - assessing the cost of this technology and compare it to the benefits received by using it, to ensure the opportunity is financially viable.
Environmental
Legal
- point, impact
Recommendation
- focus on mitigating the threats within your control.
- focus on exploiting the opportunities within your control.
- consider cost-benefit analysis

Question 21

Ratio - Inventory turn over

Answer 21

COGS/inventory average
- consider selling inventory with a discount to free up the amount of working capital tied up in inventory

Question 22

Transfer price

Answer 22

Market price
1. departments are autonomous
2. option of going external
3. no excess capacity
Variable costs plus opportunity costs (loss external sale)
Variable cost
1. capacity
2. no external sale

Question 23

EBITDA

Answer 23

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is useful in evaluating growth of companies because it encourages risk-taking in decisions to expand by ignoring financing (interest) and capital costs (depreciation and amortization).
However, on its own, EBITDA may motivate behaviour and decisions that are at odds with the long-term health.
EBITDA as a measure motivates growth, but it has a severe weakness in not taking into account the costs to achieve that growth. Specifically, when amortization and interest represent a significant portion of other expenses. Being excluded from this measure does not show the costs of growth.

Question 24

return on equity

Answer 24

the use of return on equity will measure the impact of management decisions on net income. This measure includes the costs of capital and interest in determining the success of the entity. The measure still encourages some risk-taking in that the measure will be increased by leveraging through debt financing by keeping the denominator low. However, the interest costs are not completely ignored, keeping management in check by not encouraging overextended borrowing for the sake of EBITDA only.

Question 25

Debt-to-equity

Answer 25

Debt-to-equity measures the amount of aggressiveness in financing growth. Higher debt ratios mean more risk to the shareholder of not getting a return on the investment if the cash flow generated does not exceed the cost of debt financing. The increased risk of debt financing is offset by the ability to earn return. A properly balanced risk/return profile can be achieved by comparing the company’s debt-to-equity ratio to industry norms and trends. Company-specific reasons for differing from the industry norm can still be considered within the context of the debt-to-equity ratio.

Question 26

Cash flow generation

Answer 26

Cash flow generation as a measure is also helpful. In a high-growth scenario, however, investment in capital will likely lead to a need for cash in the short term. Financial modelling should be undertaken to ensure that the investment in the business through short-term negative cash flow is offset by appropriate long-term cash flow generation. This measure, therefore, should be a long-term measure that looks beyond the next year’s budget.

Question 27

Capital expenditures

Answer 27

Capital expenditures as a percentage of revenues can also be a good measure. Again, this measure may discourage growth by rationing capital too severely during a time when capital spending should be undertaken to exploit opportunities. As with cash flow, a forward-looking, multi-year approach to this measure should ensure that long-term value is created.

Question 28

Other measures

Answer 28

product-by-product margin analysis
product life-cycle analysis