Performance Measures Flashcards by Uschi Macero

What four perspectives are included in Balanced Scorecard?

Financial / Customer / Internal Business Processes / Learning and Growth

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Why was Balanced Scorecard created?

To measure Performance.

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What are Strategy Maps?

Diagrams of Strategic Cause and Effect Relationships.

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What is a Strategic Initiative?

A plan to achieve goals.

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What measures are used under Value-Based Management?

Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow

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How is Return on Investment (ROI) calculated?

ROI : Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 : 60% ROI

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How is Residual Income calculated?

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income

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What is another name for Required Rate of Return (RROR)?

RROR is also called ‘Cost of Capital’

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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

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

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How is Spread calculated?

Spread : ROI - Cost of Capital

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What is the primary point of Economic Value Added? How is it calculated?

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

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How is Free Cash Flow calculated?

Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
\: Free Cash Flow

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What is measured by Six Sigma?

It measures a product versus its quality goal.

Goal is to reduce the number of defects in a mass production process

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What is the Asset Turnover Ratio?

Sales / Average Assets

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What does the Current Ratio tell us? How is it calculated?

Can the company pay their short-term liabilities?

Current Ratio : Current Assets / Current Liabilities

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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

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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?

Debt to Total Assets : Total Liabilities / Total Assets

What does Gross Margin % tell us? How is it calculated?

How profitable is the product after COGS?

Gross Margin : 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 Margin : Operating Profit / Net Sales

How is Times Interest Earned calculated and what does it mean?

Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

What does Return on Assets tell us? How is it calculated?

What % return are the assets generating?

Return on Assets : 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 and how is it calculated?

How quickly does inventory get sold?

Inventory Turnover : 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)

Quick Ratio : (Current Assets - Inventory) / Current Liabilities

What is Average Collection Period- and how is it calculated?

How many days does it take the company to collect payment on A/R? Average Collection Period : Average AR / Average Sales Per Day

What is an Internal Failure?

A measure of internal performance Products have quality defects- but are caught BEFORE they leave the warehouse. Scrap, rework, tooling changes, and downtime

What is an External Failure?

Measure of customer satisfaction Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls. Warranty costs, product liability costs and loss of customer goodwill, environmental costs (fees)

What is Appraisal Cost?

Quality control- testing & inspection costs.

What are the types of diagrams used to measure process performance?

1) statistical control charts 2) pareto diagrams 3) histograms 4) fishbone 5) benchmarking

What do statistical control charts do?

- monitor status of any process subject to acceptable and unacceptable variations - adv: makes trends and cycles visible - disadv: doesnt indicate cause

What is a pareto diagram?

It is a bar chart that assists with quality control analysis, allowing managers to see at a glance which areas are of most concern

What are histograms?

Similar to pareto diagrams but this displays a continuum for the independent variable

What is a fishbone diagram?

Aka cause and effect | -TQM process improvement technique useful in studying causation

What are the kinds of benchmarking?

1) competitive benchmarking: in same industry 2) process (function) benchmarking: studies orgs w/ similar process regardless of industry 3) strategic benchmarking: search for successful competitive strategies 4) internal benchmarking: applying best practices from one part of the org to another

What are the Six Sigma Roles?

1) Executive level: must be fully committed to program and it responsible for making all required resources available 2) Champion: resp for the implementation 3) Master Black Belts: assist the champions with the implementation across the org 4) Black Belts: 100 % if time is on six sigma projects 5) Green n Yellow: do six sigma + reg job

What are conformance costs?

These are costs of prevention and appraisal, which are financial measures of internal performance 1) preventions costs 2) appraisal costs

What are prevention costs?

Costs that attempt to avoid defective output. These include - preventive maintenance - employee training - review of equipment design - evaluation of suppliers

If Current or Quick Ration = 1, effect of transaction?

If =1 = numerator is the same as denominator so any changes will have same effect for both, resulting in no change in ratio. 4 - 1 / 4 - 1 = 3 / 3

If Current or Quick Ration > 1, effect of transaction?

If >1 = numerator is greater than denominator so any changes will have a less effect on numerator, resulting in a change in ratio in opposite direction. 4 - 1 / 3 - 1 = 3 / 2 If paying off CL with CA, the effect is to decrease the ratio

If Current or Quick Ration > 1, effect of transaction?