Performance Measures Flashcards
Why was Balanced Scorecard created?
To measure Performance.
What four components are included in Balanced Scorecard?
- Strategic objectives - and what is critical for success
- Performance measures
- Baseline performance
- Targets
- Strategic initiatives - key action programs required
What four perspectives are included in Balanced Scorecard?
- Financial
- ROI- Revenue Growth- Profitability
- Customer
- Increase Customers- Increase Satisfaction
- Internal Business Processes
- Efficient and Effective Operations- Improve Quality- Reduce Defects
- Learning & Growth
- Training- Personnel Development
What are Strategy Maps?
Diagrams of Strategic Cause-and-Effect Relationships between strategic objectives
- Financial
- Customer
- Internal Process
- Learning and Growth (EE or R&D)
What is a Strategic Initiative?
A plan to achieve goals.
What measures are used under Value-Based Management?
Return on Investment
Residual Income Spread
Economic Value Added
Free Cash Flow
Dupont Model
Financial
ROI = (Net Inc) / (Avg Assets)
[(Net Inc) / (Net Sales)] * [(Net Sales) / (Avg Assets)]
Return on Sales * Asset Turnover
How is Residual Income calculated?
Financial
Op Inc - (Required RoR x Invested Capital)
How is Spread calculated?
ROI - Cost of Capital
What is another name for Required Rate of Return (RROR)?
RROR is also called ‘Cost of Capital’
What is the primary point of Economic Value Added?
How is it calculated?
Investments should exceed costs- with an emphasis on stockholder value.
Net Op Inc After Tax - (Net Assets x WACC)
What is Weighted Average Cost of Capital (WACC)?
How is it calculated?
Cost of Capital is the weighted average of the interest rates you pay for your Capital.
Includes Debt and the Rate of Return your Equity Shareholders expect
How is Free Cash Flow calculated?
Net Op Inc After Tax
+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
What is the Asset Turnover Ratio?
Sales / Average Assets
What does the Current Ratio tell us? How is it calculated?
Can the company pay their short-term liabilities?
Current Assets / Current Liabilities
What does the Debt to Equity Ratio tell us?
How is it calculated?
How is the company financing its capital?
Debt to Equity Ratio = Total Debt / Total Equity
What does the Debt to Total Assets ratio tell us?
How is it calculated?
What proportions of the company’s assets are encumbered with debt?
Total Liabilities / Total Assets
What does Gross Margin % tell us?
How is it calculated?
How profitable is the product after COGS?
Gross Profit / Net Sales
What does Operating Profit Margin tell us?
How is it calculated?
How profitable is the product after all expenses (except interest and taxes)?
Operating Profit / Net Sales
How is Times Interest Earned calculated and what does it mean?
Can the company make their interest payments?
Earnings Before Tax & Interest / Interest Expense
What does Return on Assets tell us?
How is it calculated?
What % return are the assets generating?
Net Income (net of interest & taxes) / Average Total Assets
How is Market/Book ratio calculated?
Market Value of Common Stock / Book Value of Common Stock
What is Inventory Turnover
How is it calculated?
How quickly does inventory get sold?
COGS / Average Inventory
What is the Quick Ratio and how is it calculated?
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)
(Current Assets - Inventory) / Current Liabilities
What is Average Collection Period
how is it calculated?
How many days does it take the company to collect payment on A/R?
Average AR / Average Sales Per Day
What is measured by Six Sigma?
It measures a product versus its quality goal.
Cost of Quality
Prevention Cost - do it the first time
Appraisal Cost - finding
Internal Failure - fixing
External Fairlure
What is Appraisal Cost?
Quality control- testing & inspection costs.
What is an Internal Failure?
Products have quality defects- but are caught BEFORE they leave the warehouse.
What is an External Failure?
Product reaches the customer- but they are not satisfied with the quality of the product.
This includes recalls.
Limitations of Financial Ratios
- Other firms might not be comparable
- Industry avg might not be reliable
- Calculations vary
- Estimates distort results
- Financial measures only, not balanced
